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[Senate Hearing 107-279]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-279

           PUBLIC UTILITY HOLDING COMPANY ACT OF 2001--S. 206

=======================================================================

                                HEARING

                               before the

               SUBCOMMITTEE ON SECURITIES AND INVESTMENT

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

                                 S. 206

TO REPEAL THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, TO ENACT THE 
   PUBLIC UTILITY HOLDING COMPANY ACT OF 2001 AND FOR OTHER PURPOSES

                               __________

                             MARCH 29, 2001

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
77-694                     WASHINGTON : 2002

____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah              CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                ZELL MILLER, Georgia
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada                  DEBBIE STABENOW, Michigan
                                     JON S. CORZINE, New Jersey

                   Wayne A. Abernathy, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                      Linda L. Lord, Chief Counsel

                 Dean V. Shahinian, Democratic Counsel

                       George E. Whittle, Editor

                                 ______

               Subcommittee on Securities and Investment

                   MICHAEL B. ENZI, Wyoming, Chairman

            CHRISTOPHER J. DODD, Connecticut, Ranking Member

RICHARD C. SHELBY, Alabama           TIM JOHNSON, South Dakota
MIKE CRAPO, Idaho                    JACK REED, Rhode Island
ROBERT F. BENNETT, Utah              CHARLES E. SCHUMER, New York
WAYNE ALLARD, Colorado               EVAN BAYH, Indiana
CHUCK HAGEL, Nebraska                JON S. CORZINE, New Jersey
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
JIM BUNNING, Kentucky                DEBBIE STABENOW, Michigan

                   Katherine McGuire, Staff Director

                 Joel Oswald, Professional Staff Member

                                  (ii)

                            C O N T E N T S

                              ----------                              

                        THURSDAY, MARCH 29, 2001

                                                                   Page

Opening statement of Senator Enzi................................     1

Opening statements, comments, or prepared statements of:
    Senator Corzine..............................................     3
    Senator Allard...............................................     9
        Prepared statement.......................................    31
    Senator Bunning..............................................    10
        Prepared statement.......................................    31
    Senator Shelby...............................................    11
        Prepared statement.......................................    31
    Senator Stabenow.............................................    13
    Senator Gramm................................................    20
    Senator Bayh.................................................    25

                               WITNESSES

Isaac C. Hunt, Jr., Commissioner, Securities and Exchange 
  Commission.....................................................     4
    Prepared statement...........................................    32
Cynthia A. Marlette, Deputy General Counsel, Federal Energy 
  Regulatory Commission..........................................     7
    Prepared statement...........................................    36
David M. Sparby, Vice President for Government and Regulatory 
  Affairs, Xcel Energy, Incorporated.............................    14
    Prepared statement...........................................    41
David L. Sokol, Chairman and CEO, MidAmerican Energy Holdings
  Company........................................................    15
    Prepared statement...........................................    46
Charles A. Acquard, Executive Director, National Association of 
  State Utility Consumer Advocates (NASUCA)......................    18
    Prepared statement...........................................    49

              Additional Material Supplied for the Record

Prepared statement of Marty Kanner, Coordinator, On Behalf of 
  Consumers for Fair Competition.................................    53
S. 206...........................................................    59

                                 (iii)

 
         THE PUBLIC UTILITY HOLDING COMPANY ACT OF 2001--S. 206

                              ----------                              

                        THURSDAY, MARCH 29, 2001

                               U.S. Senate,
  Committee on Banking, Housing, and Urban Affairs,
                 Subcommittee on Securities and Investment,
                                                    Washington, DC.

    The Subcommittee met at 10:10 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Michael B. Enzi 
(Chairman of the Subcommittee) presiding.

          OPENING STATEMENT OF SENATOR MICHAEL B. ENZI

    Senator Enzi. I will call this hearing to order.
    I was asked by the Chairman of the Banking Committee to 
announce that this will be the first hearing since the first of 
the 50-State quarter plasters were installed. A new plaster 
will go up every 10 weeks. These are the new quarters. I can 
hardly wait until the Wyoming one goes up in 2007.
    [Laughter.]
    However, we are pushing for a space right here above the 
quarters, right in the center, for the Sacagawea dollar. We 
call that the Wyoming Dollar.
    [Laughter.]
    She may have been born in Idaho and shortly after that, 
kidnapped to North Dakota, and then went on the great 
expedition with Louis and Clarke through the whole west. But 
after she had seen the whole west, she chose to live out the 
rest of her life in Wyoming. We were so pleased to have her 
chosen for the coin. A bunch of Wyoming kids were involved in 
that process. We will be looking for that plaster to go up as 
well.
    To get down to the more serious business of this hearing, I 
would like to welcome everyone to the Senate Banking 
Subcommittee on Securities and Investments. The hearing is on 
S. 206, the Public Utility Holding Company Act of 2001. The 
bill was sponsored by my colleague, Senator Shelby from 
Alabama.
    This is my first hearing as Chairman of the Subcommittee on 
Securities and Investments. I look forward to addressing other 
issues of similar importance in the future.
    I would also like to thank the witnesses for their 
willingness to be here today and to share their insights on the 
role of this Act in 21st Century energy markets.
    I apologize for our slight delay in getting started. We are 
in the middle of a vote. Others will be joining me here 
shortly, as Senator Corzine has.
    I would mention that my first involvement with PUHCA 
actually goes back about 12 years. It was as a result of my 
daughter, who was then in 4th grade, doing an experiment in 
buying stocks as a class activity. At the dinner table, I asked 
her what stock she had purchased. After she told me, I asked 
her why. And she said, well, it had a huge increase that day. I 
asked her what the trends had been. She had no idea.
    So, she was willing to sit down at the computer with me and 

look it up on the Internet. We got a little explanation of the 
ac-
tivity of the previous day and found out that Senator Wallop of 

Wyoming had sponsored a bill to repeal PUHCA. Of course, that 
led us to some other Internet activities, where we found out 
what PUHCA was.
    I have to admit that as we finished up some 1 hour of being 
on the computer, my daughter said to me, so why did you look up 
CMS? I bought CML.
    [Laughter.]
    But it is been a tremendous advantage to me all of these 
years to have had some background in PUHCA and to follow the 
almost annual attempt to repeal it.
    A lot of things have changed since the Public Utility 
Holding Company Act, PUHCA, was first passed into law in 1935, 
partly as a result of the 1929 stock market crash.
    Our modern, high-tech economy has placed such demand on our 
aging energy grids, that we are now outpacing our ability to 
generate electricity.
    As a result, much of our Nation is poised on a fine edge, 
where we can expect more and more brown-outs, like those 
recently experienced in California.
    There is no other way to explain things, other than to say 
that we failed to plan for our future energy needs, and 
California's problems are only the beginning.
    By failing to develop a national energy policy, we have 
allowed our dependence on foreign energy supplies to place our 
Nation at a great risk.
    By placing short-term gains ahead of long-term stability, 
we have caused energy prices to jump dramatically across the 
United States. With the lines blurring between energy 
production, transportation, and consumption in the new high-
tech economy, flexibility is going to become more and more 
important.
    Without flexibility, we place incredible limits on our 
energy markets and limit our ability to adapt innovations that 
could revolutionize our children's futures.
    The question before us today, therefore, is, given the need 
for flexibility, is there room for a statute like PUHCA?
    There are considerable arguments that PUHCA has outlived 
its purpose. It was created in 1935, and was designed to fill a 
regulatory void that had allowed electricity and gas-holding 
companies to take advantage of the situation, and place layer 
upon layer of corporations between themselves and their 
customers.
    Before PUHCA, holding companies could hide behind the 
corporate layers to avoid liability and to manipulate consumer 
rates by requiring operating companies to contract services 
with each other at exorbitant prices.
    This self-dealing drove up consumer rates and threatened 
service when highly-leveraged holding companies were unable to 
pay their debts after the stock market crash in 1929.
    PUHCA put an end to many of these unfair practices and 
abuses by stripping back the corporate shields and limiting 
holding companies to just two levels.
    The statute then placed authority to monitor securities 
mergers and other activities within the companies with the 
Securities and Exchange Commission. Companies were then granted 
an exclusive service area in return for a requirement to 
provide reliable electricity service to all consumers at a 
regulated price.
    As I said earlier, however, times have changed and the role 
played by the SEC and PUHCA in utility regulation has evolved.
    The Federal Energy Regulatory Commission now has 
jurisdiction over all interstate wholesale electricity 
generation, and State public utility commissions are now 
controlling agencies that oversee State utility rates. Those 
are things that were missing in 1929 and 1935.
    The Department of Justice and the Federal Trade Commission 
now have authority over holding companies and share in 
regulating their structure and functions. The void that existed 
before PUHCA no longer exists.
    This oversight redundancy has created a situation where 
even the SEC has agreed that PUHCA is no longer necessary to 
protect investors or the rate-paying public. In fact, PUHCA has 
become 
a barrier to competition in the energy marketplace and it 
inhibits 
investment.
    I have some very high hopes about the future of Wyoming. I 
see the need exists in the United States for reliable, 
affordable energy and recognize that Wyoming is in a prime 
position to fill those needs. But I am also concerned that 
without adequate flexibility, diversity, and planning, 
Wyoming's options for the future will be severely hamstrung.
    PUHCA has a chilling effect on Wyoming investments because 
it limits the numbers of companies allowed to participate in 
investing in Wyoming's future. It also limits the kind of 
investments that are allowed. PUHCA repeal is an important step 
in the development of a comprehensive, real world energy 
policy.
    I look forward to hearing from our witnesses and hope they 
will be able to shed some light on what should be done with 
PUHCA.
    Senator do you have an opening statement that you would 
like to make?

              STATEMENT OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Mr. Chairman. I appreciate you 
holding this hearing.
    I think I probably should have requested your daughter to 
come on staff to help me with what PUHCA was.
    [Laughter.]
    As you might recognize, it is not something that was at the 
front of my agenda in my previous life. But I do think that 
this is a particularly important review, given our current 
energy situation. And I, like others, will be open-minded about 
an appropriate policy in this area. I am looking forward to the 
hearing, and I thank the witnesses for participating.
    I think it is pretty clear that anything put together in 
1935 has reasons to be reviewed to see whether it is 
appropriate, whether it is overlapping or out of date and 
unreasonably costly. And I look forward to this hearing to help 
frame those issues in my own mind.
    Thank you very much for being here.
    Senator Enzi. This is one of those issues that kind of goes 
in the glaze-your-eyes-over category. But, fortunately, the 
energy crisis has brought it to a level where there is some 
interest in doing something now.
    Senator Corzine. Absolutely.
    Senator Enzi. We have before us from the first panel, Mr. 
Isaac C. Hunt, Jr., who is the Commissioner of the Securities 
and Exchange Commission, and Ms. Cynthia Marlette, who is the 
Deputy General Counsel for the Federal Energy Regulatory 
Commission.
    We look forward to your testimony.
    Mr. Hunt.

                STATEMENT OF ISAAC C. HUNT, JR.

        COMMISSIONER, SECURITIES AND EXCHANGE COMMISSION

    Mr. Hunt. Thank you, Chairman Enzi, and other Members of 
the Subcommittee.
    I am Commissioner Isaac C. Hunt of the U.S. Securities and 
Exchange Commission. I am pleased to have this opportunity to 
testify before you this morning on behalf of the SEC regarding 
the Public Utility Holding Company Act of 1935.
    The Commission continues to support efforts to repeal the 
1935 Act and replace it with legislation that preserves certain 
important consumer protections.
    During the first quarter of the last century, misuse of the 
holding company structure led to serious problems in the 
electric and gas industries. Abuses arose, including inadequate 
disclosure of the financial position and earning power of 
holding companies, unsound accounting practices, excessive debt 
issuances and abusive affiliate transactions. The 1935 Act was 
enacted to address these problems.
    In the years following the passage of the 1935 Act, the 
Securities and Exchange Commission worked to reorganize and 
simplify existing public utility holding companies in order to 
eliminate the problems that Congress identified.
    By the early 1980's, the SEC concluded that the 1935 Act 
had accomplished its basic purpose. The SEC also concluded that 
many aspects of the 1935 Act regulation had become redundant: 
State regulation had expanded and strengthened since 1935, and 
the SEC had enhanced its regulation of all issuers of 
securities, including public utility holding companies.
    In addition, changes in the accounting profession and the 
investment banking industry had provided investors and 
consumers with a range of protection unforeseen in 1935. 
Because of these changes, the SEC unanimously recommended that 
Congress repeal the 1935 Act based on its conclusion that it 
was no longer necessary to prevent the recurrence of abuses 
that led to the Act's enactment.
    For a number of reasons, including the potential for abuse 
through the use of a multistate holding company structure, 
related concerns about consumer protection, the lack of a 
consensus for change, repeal legislation was not enacted during 
the early 1980's. Because of continuing changes in the 
industry, however, the SEC continued to look at ways to 
administer the statute more flexibly.
    In response to continuing changes in the utility industry 
during the early 1990's, then-Chairman Arthur Levitt directed 
the SEC staff in 1994 to undertake a study of the 1935 Act that 
culminated in a June 1995 report. The report again recommended 
repeal of the 1935 Act. The report also outlined and 
recommended that the Commission adopt a number of 
administrative initiatives to streamline regulation under the 
Act. The SEC has implemented many of the administrative 
initiatives that the report recommended.
    The utility industry has continued to undergo rapid change 
since publication of that report. Congress facilitated some of 
these changes by creating a number of statutory exceptions to 
the regulatory framework of the 1935 Act.
    Specifically, registered holding companies are now free to 
own exempt wholesale generators and foreign utilities, and to 
engage in a wide range of telecommunications activities.
    The industry has also experienced regulatory initiatives, 
both at the State level, where the focus has been on fostering 
competition, and at the Federal level, where the FERC--Federal 
Energy Regulatory Commission--has focused on open transmission 
and related structural issues.
    The internationalization of the industry has increased as 
well. In addition to foreign investments of U.S. utilities, three 
British utility companies have acquired American utilities within 
the past 2 years and subsequently registered under the Act. A 
Canadian utility has also announced its plans to acquire a 
utility in the United States.
    At the same time that these changes have been taking place 
in the electric industry, some problems have arisen. The 
electricity shortages, price increases, and rolling black-outs 
in California represent some of the most severe problems.
    Some industry experts, as well as a number of press 
reports, have speculated that other areas of the country may 
experience similar problems this summer. As a result of these 
issues, energy reform legislation is again being considered in 
this Congress. Repeal of PUHCA is a part of this discussion.
    Based on the findings in the report, as well as the 
continuing pace of change in the utility industry, the SEC has 
recommended and continues to recommend that Congress repeal the 
1935 Act.
    As I will outline below, the SEC also recommends the 
enactment of legislation to provide necessary authority to the 
Federal Energy Regulatory Commission and the State public 
utility commissions relating to affiliate transactions and 
audits and access to books and records. Repealing the Act is 
not, however, a magical solution to the current problems facing 
the United States utility industry.
    While PUHCA repeal can be viewed as part of a needed 
response to the current energy problems facing the country, 
repeal of the Act will not directly affect the supply of 
electricity in the United States.
    The Energy Policy Act of 1992 amended the 1935 Act to 
remove most restrictions on the ability of registered and 
exempt holding companies, as well as nonutility companies, to 
build, acquire, and own generation facilities anywhere in the 
United States.
    Repeal of the Act would, however, remove provisions that 
prohibit utility companies from owning utilities in different 
parts of the country, and that generally prevent nonutility 
businesses from acquiring regulated utilities in more than one 
State.
    Repeal of the 1935 Act would thus likely have the greatest 
impact on both the continuing consolidation of the utility 
business, as well as the entry of new companies into the 
utility business.
    As the SEC concluded in its report and testified before, 
there is potential for a regulated utility that is a monopoly, 
if left unguarded, to charge higher rates and use the 
additional funds to subsidize affiliated businesses in order to 
boost its competitive position in other markets.
    The SEC believes that the best means of guarding against 
cross-subsidization is likely to be audits of books and records 
and Federal oversight of affiliated transactions.
    As a result, the SEC continues to support a broader grant 
of authority to the FERC to audit books and records and 
believes that it is important that the FERC have the 
flexibility to engage in more extensive regulation if 
necessary. The SEC urges that S. 206 be amended to include this 
grant of authority.
    The current situation in California illustrates this need. 
California's problems may have been caused by, among other 
things, the need to construct additional generating facilities 
to meet the supply needs of the State and perhaps additional 
transmission facilities. It is unclear whether repeal of the 
1935 Act would have any real effect, positive or negative, on 
these problems.
    However, another component of California's problems is the 
precarious financial condition of the State's utilities. While 
the cost of acquiring power has had a significant impact on the 
financial condition of California's utilities, there have been 
suggestions in the press and elsewhere that these utility 
financial problems were exacerbated by the holding companies' 
decision to use the profits of their regulated utilities' 
subsidiaries to finance investments in unregulated businesses.
    Regardless of whether these suggestions are true, the 
holding companies that own California's utilities are currently 
exempt from most provisions of the 1935 Act and are thus, 
largely unregulated by the SEC. The potential for abuses of 
this type demonstrate the need to give utility regulators 
unfettered access to the books and records of holding companies 
so that they can develop a full understanding of the types of 
transactions occurring within a holding company system.
    Questions have also arisen about how the Act, if not 
repealed, would impact the FERC's ability to implement its 
plans to restructure control of transmission facilities in the 
United States.
    In particular, the status of new entities that control 
transmission systems, as well as the status of utility systems 
that own stakes in these new entities, raise a number of issues 
under the 1935 Act. Repeal of the Act would render this issue 
moot.
    In the absence of repeal, although the SEC believes it has 
the necessary authority to deal with the restructuring issues, 
amending the Act to grant the SEC greater exemptive authority 
would allow the Commission to deal more efficiently with 
potential regulatory conflicts of this type. Also, granting the 
SEC broad exemptive authority would aid in our administration 
of the Act as the electric and gas industries continue to 
evolve.
    Senator Enzi and other Members of the Subcommittee, of 
course I would be pleased to answer any of your questions.
    Thank you.
    Senator Enzi. Thank you.
    Ms. Marlette.

                STATEMENT OF CYNTHIA A. MARLETTE

                     DEPUTY GENERAL COUNSEL

              FEDERAL ENERGY REGULATORY COMMISSION

    Ms. Marlette. Thank you, Senator Enzi, and Members of the 
Subcommittee.
    My name is Cynthia Marlette and I am Deputy General Counsel 
of the Federal Energy Regulatory Commission.
    I very much appreciate the opportunity to be here today to 
discuss the Public Utility Holding Company Act of 1935, and S. 
206, which would repeal that Act and replace it with a more 
streamlined holding company act.
    I appear before you today as a staff witness and I do not 
represent the Commission or any member of the Commission.
    As discussed in my written testimony, S. 206 provides an 
important piece of the legislative reform that is needed to 
support the Nation's emerging competitive electric energy 
markets.
    At this critical stage in the evolution of the industry, it 
is important to take all reasonable measures to support the 
development of competitive energy markets and to provide 
appropriate incentives for electric and natural gas 
infrastructure to meet our Nation's energy needs. However, such 
measures must ensure adequate protection of electric and 
natural gas rate-payers from abuse of market power and from 
inappropriate affiliate cross-subsidization.
    Repeal or reform of PUHCA, such as that contained in S. 
206, will help accomplish these objectives.
    This is a time of enormous change for the electric utility 
industry. We are at a critical juncture in the development of 
competitive power markets and it is appropriate for the 
Congress to reexamine the framework for regulating electric 
utilities, including unnecessary restrictions that PUHCA places 
on the activities of certain participants in these power 
markets.
    While one of the goals of PUHCA was to protect against 
corporate structures that could harm investors and rate-payers, 
today, some of PUHCA's restrictions may actually impede 
competition and appropriate competitive market structures, to 
the detriment of rate-payers and share-holders in the long run.
    Since the Banking Committee's hearings on PUHCA reform were 
held in 1996 and 1997, the FERC and many State regulators and 
State legislatures have continued to move forward and to take 
regulatory actions to support and encourage the development of 
competitive markets at both the wholesale as well as the retail 
levels. Many areas of the country have been very successful. 
But there have been some very severe bumps in the road.
    California's experience with only a partially deregulated 
electric generation market, and a severe lack of adequate 
generation supply and infrastructure, also transmission 
infrastructure in California, have recently grabbed media 
attention nationwide and caused some regulators and industry 
observers to become wary of the promised virtues of competition 
in the electric industry. There is no doubt that California and 
the west face very serious, complex, electric power supply 
problems, particularly this coming summer.
    Nevertheless, while regulators and industry participants 
may disagree on near-term remedies to address the dysfunctions 
in California and western power markets, the majority of 
industry observers continue to believe that competitive power 
markets, as opposed to traditional heavy-handed, cost-based 
regulation, will best serve consumers in the long run.
    Enactment of S. 206 would help to remove unnecessary 
restrictions on market participants in competitive power 
markets.
    Critically important, however, it would also ensure that 
the FERC and State regulatory authorities have adequate access 
to the books and records of all members of all public utility 
holding company systems when that information is necessary to 
meet their statutory rate-making responsibilities.
    This is necessary to prevent affiliate abuse and 
subsidization by electricity rate-payers of the nonregulated 
activities of holding companies and their affiliates.
    S. 206 addresses all of the concerns that were raised by 
FERC witnesses in previous hearings and is an appropriate 
vehicle for repealing PUHCA without impairing rate-payer 
protection.
    Finally, I believe that the combination of the books and 
records provisions contained in S. 206, in conjunction with the 
FERC's additional Federal Power Act access to books and 
records, and its other FPA authorities over mergers, 
dispositions and acquisitions of jurisdictional facilities, and 
over the rate-making and accounting of public utilities, will 
provide adequate authority to protect rate-payers in newly 
emerging competitive markets.
    Thank you, and I will be happy to answer any questions.
    Senator Enzi. Well, I thank both of you for your testimony. 
We will now have a round of questions, with each Senator being 
allowed to ask questions for up to 5 minutes.
    Ms. Marlette, you mentioned that FERC had had previous 
hearings on this. How many years has FERC been looking at 
hearings on repealing PUHCA?
    Ms. Marlette. Well, we participated extensively back in the 
1992 EPAct hearings with respect to the wholesale generator 
exemption provision. And I believe we have participated in 
hearings on every bill since that time and have advocated 
reform of PUHCA, assuming rate-payer protection remains intact.
    Senator Enzi. Thank you. Mr. Hunt mentioned that the SEC 
recommended in 1980 that this statute be terminated. It took a 
while for the excitement to generate on it.
    [Laughter.]
    I appreciate your mentioning, and you mentioned it 
peripherally, the impacts that PUHCA has had on the California 
energy crisis. Could you elaborate a little bit on the 
relationship between PUHCA and the crisis in California?
    Ms. Marlette. I think the California energy crisis has been 
a wake-up call for the entire country. While I do not think 
there is a direct nexus between PUHCA reform and the specific 
factors that have affected California, I do think that, in the 
long run, repeal of PUHCA, to the extent that it removes 
restrictions on entities willing to invest in companies that 
can provide new infrastructure or expand existing 
infrastructure in transmission, electric generation and natural 
gas pipelines, can help to avoid similar problems in the future 
in the Nation.
    Senator Enzi. Thank you. Mr. Hunt, one of the arguments 
raised by opponents of PUHCA repeal, is that PUHCA currently 
fills a void in regulating holding companies that would 
otherwise lead to increased market concentration and increase 
the risk of rapid consolidation, and that that would kill the 
developing market in its infancy. Do you feel that PUHCA repeal 
would allow utilities to gain substantial market power and 
inhibit that competition?
    Mr. Hunt. I think, Mr. Chairman, the repeal of PUHCA might 
lead to continued consolidation in the utility industries. But, 
in terms of market power, I think that the restructuring that 
the FERC has gone through with the utilities and the 
restructuring that many of the States are going through, show 
that concerns about market power can be addressed.
    Senator Enzi. You mentioned the SEC's support for S. 206, 
with some amendments. And that the bill contains adequate 
consumer protections to replace those that would be repealed 
with passage of this bill. Could you elaborate a little bit on 
what those consumer protections are?
    Mr. Hunt. Well, I think that part of consumer protection is 
our ability to look at affiliate transactions to see that there 
is no improper cross-subsidization, no use of rate-payer money 
to invest in nonregulated activities of the other subsidiaries 
of the holding company. We continue to think that access to 
books and the ability to audit the books and records of the 
holding companies are necessary powers at the Federal level and 
should be vested in the FERC. And also that the State utility 
commissions, in keeping with consumer and rate-payer 
protection, should have access to the books and records so as 
to be able to examine the affiliate transactions within the 
holding company systems.
    Senator Enzi. Thank you.
    Senator Corzine.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Senator Enzi, if I may interrupt you just 
one 
moment here.
    I am going to have to preside at 11 a.m. I wonder if I 
might ask special permission from you and the Subcommittee to 
submit my written comments for the record now.
    Senator Enzi. Without objection, so ordered. We appreciate 
it. And I would mention that Senator Shelby is here now. He is 
the sponsor of the bill.
    Senator Shelby. And Senator Enzi, I would ask that my 
opening statement be made part of the record and I will wait my 
turn.
    Senator Enzi. Without objection.
    Senator Corzine.
    Senator Corzine. Senator Enzi, presumably, the ability to 
check the books and records currently exists. It is just the 
overlap that is the problem with PUHCA.
    Do you think that the tools of FERC are adequate to be able 
to check those books and records? You read now assertions, as 
opposed to factual reality, that there may be cross-
subsidization, or at least tie-ins, among the utilities in the 
California issue.
    And I am just curious whether you think the powers and the 
frequency of review is adequate enough to know if we were to 
repeal PUHCA and move to a less complicated regulatory 
structure, that that would be able to be challenged.
    Ms. Marlette. I think that the access to books and records 
that is contained in S. 206, in conjunction with what the 
Commission already has under Section 301 of the Federal Power 
Act, which in and of itself is already fairly broad access to 
books and records, would give the Commission sufficient 
authority.
    The Commission has long been very concerned about 
inappropriate cross-subsidization, particularly where you 
continue to have captive rate-payers, either at the wholesale 
or retail level. And there certainly are many areas of the 
country where we do not have captive rate-payers any more. But 
we have long been vigilant in looking at affiliate contracts 
involving any public utilities or any inappropriate cross-
subsidization.
    Senator Corzine. What would be some of the warning signals 
you would look for in those cross-subsidizations?
    Ms. Marlette. Well, in a traditional rate case, where you 
are having cost-based rates, and we are in a transition here 
because we are still doing some cost-based, but primarily 
moving to market-based rates, when we examine the costs 
submitted by the company, the Commission is going to be paying 
attention to what those are.
    And a key example in the past has been affiliate coal or 
fuel contracts and paying more than what you might pay from a 
nonaffiliate for the same fuel.
    And we have had some conflicts with PUHCA in the past that 
led to an Ohio Power court decision which caused some real 
problems for us. That is a primary example of what we would 
look at.
    Senator Corzine. I think making sure you have the adequate 
tools and resources to be able to do it. It is a complicated 
issue, looking at how holding companies fit together based on 
at least my own perspective in life, that it would be 
difficult, but not impossible, to do.
    And I hope if we move in the direction of S. 206, that we 
make sure that there are adequate resources to be able to bring 
the checks and balances that I think the public would expect.
    Thank you, Senator Enzi.
    Senator Enzi. Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Senator Enzi, thank you for holding this 
hearing on S. 206, and I look forward to hearing from the 
remaining witnesses.
    This question is for either witness, opponents of PUHCA 
repeal fear that repeal will lead to a greater concentration of 
power companies. How do you respond to those concerns?
    Mr. Hunt. As I think I responded to Senator Enzi, Senator 
Bunning, we at the SEC think that there is the possibility that 
repeal of PUHCA would lead to increasing consolidation in the 
utility industry. But we also think that----
    Senator Bunning. You do believe that.
    Mr. Hunt. Yes. We think it is possible. We think it is 
entirely possible.
    Senator Bunning. Okay.
    Mr. Hunt. Because PUHCA does put some restrictions on the 
geographic location of utilities and what utility holding 
companies can own in various parts of the country and the 
utilities have to be in contiguous areas. Yes, we could say 
with the removal of those factors, there could be more 
consolidation in the utility industry.
    But we think that, with the added powers that we hope the 
FERC will be given, there will not be either consumer or rate-
payer abuse because they will have adequate authority to look 
at affiliate transactions and to look at cross-subsidizations.
    Ms. Marlette. I think since the advent of open access 
transmission beginning around 1996, we have already seen 
tremendous increases in consolidations and mergers at the FERC.
    Senator Bunning. I would say that is an understatement.
    Ms. Marlette. Correct. And it keeps us very busy. And I 
would expect we would see even more if PUHCA were repealed.
    However, the Commission has, I believe, adequate authority 
over mergers, acquisitions, dispositions of jurisdictional 
transmission facilities and transfers of power sales contracts 
that often accompany generation transfers.
    And the Commission takes a very hard look at increases in 
market power attributable to a merger. It looks at rate-payer 
impacts and effect on regulation and does not hesitate to 
impose conditions to mitigate market power as a condition of 
approving merger, if appropriate.
    Senator Bunning. Supporters say that PUHCA only affects a 
few companies. It gives companies not regulated under PUHCA 
an unfair competitive advantage. How do you respond to those 
assertions?
    Mr. Hunt. There are very few regulated utility holding 
companies registered under PUHCA because so many of the utility 
companies in the country are intrastate and, therefore, 
exempted from most of the provisions of PUHCA.
    But we have been trying to administer the Act to create a 
level playing field so that the regulated registered holding 
companies have as much flexibility as possible for investment 
in other activities as do the nonregulated utilities, which 
make up the majority of the holding companies in the country.
    Senator Bunning. Do you have a different answer, or the 
same?
    Ms. Marlette. Same.
    Senator Bunning. Same answer. I yield back my time.
    Senator Enzi. Continuing with the order of arrival, we will 
go to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Senator Enzi. I do want to take 
this time to thank you for holding this hearing. We think it is 
very important. I think dealing with the PUHCA problem is long 
past due. And this is why I have been pushing this on a 
legislative plane for a long time.
    Ms. Marlette, one of my biggest concerns with PUHCA is that 
it inhibits modernization of our national energy policy. What 
are your views regarding the effect that PUHCA will have on the 
implementation of FERC Order 2000?
    Ms. Marlette. FERC Order 2000 is one of the biggest 
priorities of the Commission right now. Of course, California 
is also one of the biggest priorities.
    But the creation of independent regional transmission 
organizations is, we think, the key to mitigating the major 
market power of vertically-integrated electric utilities, 
improving reliability of the transmission grid, and assuring 
more efficient use of our transmission facilities.
    It will also facilitate transmission expansion and planning 
on a regional basis. And it will separate the transmission 
ownership and control from the generation entities.
    PUHCA right now, I believe, is an impediment to entities 
being able to invest in independent transmission companies that 
would qualify as RTO's.
    I believe there is a risk that investors would become 
holding companies and that they would have to register. It may 
be that the SEC has latitude under existing law to enact 
waivers or something similar. But I think it poses some real 
difficulties.
    Senator Shelby. Mr. Hunt, do you have any comment?
    Mr. Hunt. Yes, sir. We also recognize the possible 
conflicts with the FERC if the RTO's come on line, and they may 
have to register as holding companies.
    We think we have the power under existing law to exempt 
them, but that is not at all clear. We think that the repeal of 
the existing PUHCA would clear up that potential conflict 
between the SEC and the FERC.
    Senator Shelby. Ms. Marlette, is the Commission 
contemplating any action to ensure the implementation of the 
FERC Order 2000 that it would proceed efficiently?
    Ms. Marlette. We are trying to proceed as rapidly as we 
can. All public utilities had to come in with either proposals 
to create RTO's or to join RTO's last October and last January. 
All of those filings are in.
    The rule that we have in place is voluntary. We have asked 
the utilities to either, as I said, join or create an RTO or 
explain why they are not. We have said that those RTO's need to 
be operational by the end of this calendar year, which will be 
no small feat.
    Senator Shelby. Just this week, it was announced that the 
financial condition of the California utilities force them to 
raise rates by as much as 40 percent.
    A few months ago, under California's restructuring plan, 
these same utilities put out for bid some of their generating 
assets in an effort to raise cash. It is my understanding that 
because of the restrictions imposed by PUHCA, only a limited 
number of entities bid on those assets.
    Could it be argued that by limiting the number of bidders, 
PUHCA indirectly limited the amount of capital the utilities 
raised and that lack of capital in turn affected the size of 
the rate hike that was ultimately put in place? In other words, 
PUHCA contributed to making a bad situation worse.
    Ms. Marlette. I may defer to Commissioner Hunt on that. I 
would just say that the rate hike, I think, was the result of--
--
    Senator Shelby. As a sponsor of the legislation, that 
question came naturally.
    Ms. Marlette. Right. Right.
    [Laughter.]
    But I think a combination of very complex factors led to 
that 
rate hike.
    Mr. Hunt. Senator Shelby, I think there is certainly some 
possibility that PUHCA's restrictions on the possibility of 
people and entities who could invest in----
    Senator Shelby. Limited it, anyway, didn't it?
    Mr. Hunt. It certainly is possible that PUCHA could have 
limited the number of investors willing to go into the 
California scene, yes, sir.
    Senator Shelby. S. 206 is intended to strengthen FERC and 
the State regulators' authority to obtain the books and records 
of the companies in the holding company system.
    Ms. Marlette, I know you look at this from the other side 
of the issue. But how do you assess these provisions as a means 
to provide rate-payer protections?
    Ms. Marlette. I think that they will help us to provide 
rate-payer protections, the provisions in S. 206, because they 
will allow us to look at a broader category of entities' books 
and records than we currently can look at.
    Senator Shelby. Okay. Thank you, Senator Enzi.
    Senator Enzi. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Senator Enzi.
    If I may just follow up as it relates to concerns that I 
know that have been raised about the States lacking authority 
or resources to provide adequate oversight of interstate public 
utility holding company activities. Could you speak more 
specifically to that, as to their ability, authority, to be 
able to do that and the resources? Do you feel confident that 
that will be available?
    Either one of you.
    Mr. Hunt. Well, we think the FERC is an essential element 
in the continuing regulatory scheme because, with the 
interstate operation of so many holding companies, there are 
many instances where no one State utility commission can 
regulate the entire holding company structure. And that is why 
we think a Federal presence continues to be necessary. But we 
want us taken out.
    [Laughter.]
    Senator Stabenow. Ms. Marlette, do you want to speak to 
that?
    Ms. Marlette. I would just say that I would certainly defer 
to the States on their abilities. But I do think that S. 206, 
the provision that applies to States now, allows them to be 
able to reach out of State to other companies' books and 
records that they cannot previously reach at this time, which 
would help a lot.
    Senator Stabenow. Thank you, Senator Enzi.
    Senator Enzi. I want to thank this panel. It was very nice 
of you, Mr. Commissioner, to take the time to come and share 
this.
    Mr. Hunt. Thank you, Senator Enzi.
    Senator Enzi. And Ms. Marlette, we really appreciate the 
perspective that you provided from the Federal Energy 
Regulatory Commission.
    Ms. Marlette. Thank you, Senator Enzi.
    Senator Enzi. There may be additional questions that will 
be directed to you. We will leave the record open for that 
possibility.
    Thank you very much.
    Mr. Hunt. Thank you.
    Ms. Marlette. Thank you.
    Senator Enzi. Our next panel will be: Mr. David M. Sparby, 
Vice President for Government and Regulatory Affairs, Xcel 
Energy, Incorporated; Mr. David Sokol, Chairman and CEO of 
MidAmerican Energy Holdings Company; and Mr. Charles Acquard, 
who is the Executive Director of the National Association for 
State Utility Consumer Advocates. Is that NASUCA?
    Mr. Acquard. Yes.
    Senator Enzi. Okay. Mr. Sparby.

                  STATEMENT OF DAVID M. SPARBY

               VICE PRESIDENT FOR GOVERNMENT AND

         REGULATORY AFFAIRS, XCEL ENERGY, INCORPORATED

    Mr. Sparby. Senator Enzi, Members of the Subcommittee, 
thank you for the opportunity to be here this morning.
    I am Dave Sparby, Vice President of Government and 
Regulatory Affairs for Xcel Energy.
    Xcel is a registered holding company that serves about 5 
million customers at retail in 12 States, including Wisconsin, 
Wyoming, North and South Dakota, Colorado, New Mexico, 
Minnesota, Michigan and Texas.
    We also own most of NRG, which is an independent power 
producer across the United States.
    My purpose today is to recommend the passage of S. 206, to 
urge its passage as soon as possible, and to make this part of 
an ongoing effort to address this Nation's energy shortfall.
    Many regions in which Xcel participates are in need of 
additional transmission and generation investment over the next 
few years.
    The capital requirements associated with these projects are 
very significant. For many of these customers, the need for 
additional facilities will come much sooner.
    Although the demand for electricity, the regionalization of 
the power industry, the insufficient utility investment over 
time has been seen in California, the combination of these 
events is affecting an increasing number of markets beyond 
California's borders.
    Although I appreciate the hardships faced by Californians 
this past January during the periods of rolling black-outs, I 
can say that similar outages would have far more serious 
consequences when you serve climates like North Dakota's this 
past January, that registered temperatures well below zero on 
days they had electric curtailments in the southwest.
    Now although we have not seen the black-outs that the 
southwest has experienced, we have seen the cost of procuring 
electricity reaching prices many times its historic peaks.
    The sustained price hikes hit our communities hard and at a 
time during low agricultural prices, a difficult rural economy 
and an economic slowdown area also taking place.
    A good example of what we are seeing is our experience in 
procuring power for Cheyenne, WY this past year. Cheyenne 
purchases and distributes electricity to the City of Cheyenne 
and much of Laramie County, WY.
    Now although the western market in the past has allowed us 
to procure energy at prices less than 3 cents a kilowatt hour, 
this year, similar market prices were more than 4 times that 
earlier cost. When we were not able to purchase power on 
acceptable conditions, we responded by entering into 
arrangements to permit the construction of new facilities.
    However, even the briefest exposure to prices of these 
magnitudes have severe adverse and long-lasting consequences on 
customers and communities. These problems are stretching well 
beyond Wyoming and affecting other communities as well.
    There are some bitter ironies, however, for citizens of 
Wyoming to pay these kinds of prices, Wyoming sits on more than 
400 billion tons of coal, huge reserves of natural gas and 
other resources.
    Clearly, we need to repeal those policies that inhibit the 
development of this energy and incent companies to make 
investments necessary to develop these resources. The passage 
of S. 206, with its consumer safeguards, is an important 
element of this plan.
    Today, PUHCA impedes the investment from nonutility 
companies who may choose to acquire regulated utilities. It 
limits investment in retail facilities at odds with the 
policies of other agencies working to develop a competitive 
market. It imposes a costly, unnecessary regulatory burden on 
companies. Legislative proposals considered today will benefit 
all the stakeholders in this industry.
    In conclusion, let me say that I recognize the passage of 
this bill will not result in lower prices for customers 
immediately. We are a long lead-time industry. But the bill 
represents an important part of a long-term strategy to ensure 
that we not only have an adequate supply of energy, but that it 
be abundant.
    Thank you.
    Senator Enzi. Thank you. Mr. Sokol.

                  STATEMENT OF DAVID L. SOKOL

                        CHAIRMAN AND CEO

              MIDAMERICAN ENERGY HOLDINGS COMPANY

    Mr. Sokol. Senator Enzi, Members of the Subcommittee, my 
name is Dave Sokol. I am the CEO of MidAmerican Energy Holdings 
Company, which is headquartered in Des Moines, IA, and with 
approximately $11 billion in assets.
    We are here today representing both MidAmerican and other 
exempt utility holding companies that support S. 206.
    Our company consists of four major subsidiaries--our 
CalEnergy division is a gas-fired generator of electricity and 
one of the largest geothermal and renewable energy providers in 
the United States.
    MidAmerican Energy is a regulated electric and gas utility 
serving primarily Iowa, but also parts of South Dakota, 
Illinois, and small parts of Nebraska.
    Our two other subsidiaries are Northern Electric, a large 
electric and gas utility in the United Kingdom, and our home 
services division, which is a real estate company which 
operates in nine States, including Maryland, Kentucky, and 
Indiana.
    Last year, our largest investor, Warren Buffett, and I 
discussed PUHCA repeal with several congressional leaders. We 
warned that the electricity sector was headed for a train wreck 
in either California or the upper Midwest.
    We do not take any pleasure in being correct in that 
prediction. We do hope that you will understand why we believe 
so strongly that Congress must act now. The numerous and 
complex causes of the California energy crisis can be tied to 
two core problems--the lack of adequate investment in 
infrastructure and regulatory policies that distort energy 
markets.
    PUHCA did not stop the problems in California from 
occurring, but in certain respects, they actually have 
exacerbated them.
    The law should be repealed and only Congress can do so. To 
do otherwise would leave a Federal statute on the books that 
will continue to inhibit investment and distort markets 
throughout this country. Let me give you two concrete examples 
of how PUHCA is limiting investment in the energy 
infrastructure of California.
    Last summer, when we saw signs of severe problems in 
California's electricity market, we wanted to make several 
investments in existing utility infrastructure, but were 
blocked by the Public Utility Holding Company Act.
    MidAmerican is exempt from the most intrusive regulatory 
restrictions of the Act because our regulated utility business 
is primarily in one State--Iowa. However, we cannot acquire 
more than 4.9 percent equity in any California utility without 
running afoul of certain PUHCA roadblocks.
    For example, the physical integration requirements of PUHCA 
would have required us to demonstrate that we could physically 
interconnect our Iowa utility system with those of the 
California utilities. This is obviously an impossible standard 
for us and the other two-thirds of the American utilities 
operating east of the Rockies in the United States to meet. 
Moreover, the standard simply makes no sense today.
    Second, even if we could have met the physical integration 
requirements, we would have been forced to become a registered 
holding company under the Act, which would have required us 
either to separate ourselves from Berkshire Hathaway, or to 
have Berkshire Hathaway divest all of its nonenergy assets. 
Obviously, neither option is acceptable.
    Take a moment to reflect on the absurdity of this--a 
Federal law enacted nearly 65 years ago with the intent of 
protecting investors keeps Berkshire Hathaway, one of the only 
AAA entities in the world, from investing in California's 
utility markets when the State's own utilities cannot even pay 
their bills. Let me give you another example.
    We wanted to double the size of our geothermal facilities 
in the Imperial Valley of California to provide desperately 
needed electricity to the California market. Again, PUHCA 
stands in the way. A new transmission line is needed which 
California's investor-owned utilities are in no financial 
condition to undertake. We cannot do it because of PUHCA.
    California's utilities will have a difficult time raising 
capital for new infrastructure, yet PUHCA prevents most 
utilities and impedes most nonutility companies from meeting 
the extensive transmission needs in that State and limits 
opportunities for investment in new generation. Without S. 206, 
where will the needed capital come from?
    The most likely scenario, we believe, is from foreign 
utility companies looking for a foothold in the United States. 
These companies are not restricted by the physical integration 
requirements of PUHCA on their first-bite entry into the 
American market. So they enjoy a substantial advantage over 
U.S. companies in the merger and acquisition market.
    I am not making a case against international investment. In 
fact, we strongly support it. But outdated, unnecessary laws 
should not hamstring American companies in this competition.
    Are there any good reasons not to repeal PUHCA? No. It made 
sense when it was enacted 66 years ago, when the SEC was in its 
infancy and there was no other statutory framework to control 
the misuse of the holding company structure. Today, however, 
that has changed. FERC and State commissions now closely 
regulate investor-owned utilities and will have more authority 
under S. 206.
    As a result, PUHCA today is extraneous. It is an overlay of 
duplicative legislation that restricts healthy investment and 
creates no real value for consumers. That is why the SEC, the 
agency charged with enforcing PUHCA, has sought to repeal PUHCA 

for almost 20 years. PUHCA repeal will make it much easier for 
FERC to continue policies to promote efficient, competitive 
wholesale markets. For example, while PUHCA is premised on 
geographically limiting utility companies, FERC is working to 
reduce market concentration.
    PUHCA repeal is clearly proconsumer. Repealing PUHCA will 
allow new investment, new ideas, and new efficiencies in the 
electric and gas industries at a time when they are needed 
most.
    A study we commissioned last year by the highly respected 
econometrics firm of Analysis Group/Economics used very 
conservative estimates to show that PUHCA directly costs the 
American economy hundreds of millions of dollars annually. 
Other surveys put the lost opportunity costs in the industry in 
the many billions. Why then has PUHCA not been repealed?
    Because it is being held hostage to the larger electricity 
debate. Other stake-holders in the industry use PUHCA repeal as 
leverage to achieve their goals in energy policy. We believe it 
is time to end this stalemate because the losers in this hard-
played game over PUHCA repeal have been America's energy 
consumers.
    The last point I would like to make is Mr. Sarby's company, 
Xcel Energy, is a registered holding company, subject to the 
most stringent restrictions of PUHCA.
    In spite of the fact that our companies are regional 
competitors on the wholesale market, we fully support his 
company being removed from PUHCA's onerous restrictions. He 
supports our company being able to expand beyond our limited 
geographical scope.
    By removing both of our companies from PUHCA restraints, 
you will enable each of us to compete more aggressively, 
operate more efficiently, and serve customers better. We urge 
your support of 
S. 206. Thank you.
    Senator Enzi. Mr. Acquard.

                STATEMENT OF CHARLES A. ACQUARD

          EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF

           STATE UTILITY CONSUMER ADVOCATES (NASUCA)

    Mr. Acquard. Thank you, Senator Enzi.
    I do not know if we are going to solve anything here today, 
but one thing we have learned is that your 4th grader is the 
only child who knows anything about the Public Utility Holding 
Company Act, and I commend her for that.
    [Laughter.]
    Good morning, Senator Enzi, and Members of the 
Subcommittee.
    I am Charlie Acquard, Executive Director of the National 
Association of State Utility Consumer Advocates, or NASUCA.
    NASUCA is an association of 41 consumer advocate offices in 
39 States and the District of Columbia. Our members are 
designated by the laws of their respective States to represent 
the interests of mostly residential consumers before State and 
Federal regulators and in the courts.
    Some of my members are divisions of State attorneys general 
offices and some are independent State agencies. Many of the 
heads of the offices are appointed by governors of States and 
in many cases, confirmed by the State's legislative body.
    On behalf of the members of NASUCA, I wish to thank you for 
the opportunity to testify before this Subcommittee on the 
Public Utility Holding Company Act.
    The question before this Subcommittee today is on the 
future of PUHCA. Yet, this issue cannot be examined outside the 
context of the entire framework of the electric utility 
industry without considering the market implications for 
consumers and competitors alike. No one has to tell this 
Subcommittee that the electric utility industry is in the midst 
of substantial change, uncertainty, and, in some places, 
turmoil.
    It is a front-page, 6 p.m., lead news story. Anybody 
involved with this industry cannot escape the over-the-
backyard-fence or soccer-sidelines inquiries from concerned 
neighbors.
    Up until recently, whenever I was asked at a gathering 
about what I do for a living, silence followed and the subject 
was then quickly changed. Now a crowd gathers and I get a lot 
of questions about the possibility of the crisis in California 
happening in Maryland, where I live. For the first time I can 
remember, people are worried about their lights coming on when 
the switch is flipped.
    Examination or possible elimination of key industry 
underpin-nings can no longer be done in a vacuum or viewed 
through a narrow jurisdictional prism that this is simply a 
securities regulation issue. Rather, any discussion of 
substantial alteration or repeal of PUHCA must be considered in 
the context of the potential impact on industry structure, 
market power, and ultimately, consumers.
    PUHCA has been on the minds of consumer advocates since the 
origins of NASUCA as an organization. In a series of 
resolutions dating back almost 20 years, NASUCA has urged 
Congress to exercise the greatest caution in responding to 
efforts to dismantle the consumer protections contains in 
PUHCA.
    We are not Luddites. We have negotiated many of the 
existing changes to PUHCA, including the gas-related activities 
act.
    But NASUCA continues to oppose changes to PUHCA that would 
reduce consumer protections in the Act at this time. NASUCA 
urges Congress and the SEC not to take any action that would 
weaken the Act without first ensuring that public utility 
holding companies are either subject to effective competition 
or subject to effective regulation, where effective competition 
does not yet exist or competition would not induce efficiency, 
reduce cost, and advance consumer interest.
    Our resolutions recognize that public utility holding 
companies and their subsidiaries are affected with the national 
public interest and that their activities extending over many 
States are not susceptible to effective control by any 
individual State. We also recognize that neither the electric 
industry, nor the natural gas industry, has a fully competitive 
market structure and that utility market power remains 
pervasive.
    Therefore, we conclude if PUHCA were repealed today in the 
manner proposed in S. 206, neither the remaining regulatory 
scheme, nor the current state of competition would be 
sufficient to protect consumers.
    Specifically, if PUHCA were repealed, consumers would face 
increased risk from diversification. PUHCA discourages 
diversification into nonutility business and regulates capital 
structure.
    Without these consumer protection provisions, holding 
companies could diversify into risky ventures, pledging utility 
assets as collateral, and loaning funds from utility operations 
to nonutility affiliates. The last thing consumers need is the 
dot-comming of America's electric utilities. Consumers would 
also have last choice, as the SEC testified to.
    If PUHCA is repealed on a stand-alone basis, the industry 
is likely to be dominated by a few large companies wielding 
incredible market power. If California has taught us anything, 
it is that a vibrant, competitive wholesale market is needed 
for retail competition to succeed. Competitive markets need a 
multiplicity of participants, not just a couple of two-ton 
utility gorillas.
    Finally, in response to your question regarding how the 
repeal of PUHCA may help alleviate the current energy crisis, 
the short answer is that it would not. For the most part, the 
current energy crisis is caused by a shortage of supply. PUHCA 
is not an impediment to building power plants. In fact, the 
Energy Policy Act of 1992 specifically includes a PUHCA 
exempted for EWG's or exempts wholesale generators.
    Proponents of stand-alone PUHCA repeal argue that the 
statute is no longer needed, that this is a Depression-era 
relic. They say, in 60 some odd years since its passage, 
securities regulation and State commissions have matured.
    But NASUCA believes that, as John Dingell once said, times 
have changed, but human nature has not. Businesses will always 
seek market dominance in an attempt to squash competition. Mid-
managers to chairmen of the boards are handsomely rewarded when 
they do so.
    But in an essential services industry, where monopoly power 
will continue to at least dominate the distribution and 
transmission functions, continued structural protections are 
needed to ensure that consumers are not left holding the bag.
    Thank you for the opportunity to be here today and I look 
forward to any questions that you may have.
    Senator Enzi. Thank you. I will defer to Senator Gramm 
Chairman of the Banking Committee who is with us now, for any 
statement or questions he wants to ask.

                STATEMENT OF SENATOR PHIL GRAMM

    Senator Gramm. Well, Senator Enzi, let me thank you for 
this excellent hearing. I am sorry I missed the first panel. I 
was over working on the floor. I got to hear most of the second 
panel.
    I want to thank everybody for participating. I want to 
thank you, Senator Enzi, for your leadership on this issue.
    Senator Shelby and I first discussed PUHCA repeal when we 
were Democrats----
    [Laughter.]
    Members of the then-Energy and Commerce Committee in the 
House of Representatives. We were sitting next to each other 
when this subject was first discussed.
    Senator Shelby. 1979.
    Senator Gramm. And that was in 1979. Senator Shelby has 
been a leader on this effort ever since.
    I believe the year has come to repeal PUHCA. I plan to hold 
a mark-up on this bill, perhaps as early as next week. We have 
reported it in the past, but other issues have ended up 
interfering with it.
    There has been a belief that this was helpful, that this 
was a positive thing to do. But there was some other thing that 
was more important that might be used, that we might use PUHCA 
as a rider for.
    And I am reminded of that old poem that went:

          Truth worth is in being, not seeming--
          In doing, each day that goes by,
          Some little good--
          Not in dreaming
          Of great things to do by and by.

    I just want to say to those who have been a leader on this 
effort, that this is the year that we are going to repeal 
PUHCA. This is the year that--there is not any other issue 
bigger that we have any chance of getting a consensus on.
    This is a thing that, it seems to me, needs to be done. And 
I want to pledge myself to an all-out effort this year to 
repeal this bill. Hopefully, PUHCA is in its last year of life, 
2001. And I want to thank you, Senator Enzi.
    Senator Enzi. Thank you.
    Senator Corzine.
    Senator Corzine. I just want to thank Senator Enzi for 
giving 
me the opportunity to come after Senator Gramm with regard to 
this issue.
    [Laughter.]
    I do not have any poetry to recite. I do want to ask a 
question, however, of Mr. Acquard.
    It was noted in your testimony that you would argue that 
there are places where affiliates' books and records would be 
exempted from review.
    We heard in the first panel that we had security that FERC 
would have the ability to check the inter-affiliate 
transactions. Do you want to talk a little bit about where you 
think exclusions are and what the implications of those 
particular exclusions might be?
    Mr. Acquard. Yes. I do not want to minimize the importance 
of the books and records provision. I want to praise Senators 
Shelby and Gramm for including those. There is a lot of good 
provisions in this bill and I think we have seen an improvement 
over the years of the holding company act.
    I am also pleased to say that there is no doubt that you 
want to continue to protect consumers, although you want to 
repeal PUHCA. So there is that consensus that there needs to be 
some sort of action taken to protect consumers if the holding 
company act is repealed. Where we differ is that, once you do 
that, is that going to be effective?
    Now books and records can be effective, and that is good. 
But that means that you are going to have to chase after a 
holding company that has done some wrong, and that is very 
difficult.
    The question was raised earlier in the hearing whether or 
not the Commissions have the resources to do it, no matter what 
the statutory regulations that they have. I cannot speak for 
the Commissions, but I can speak for the consumer advocate 
offices.
    About half of my members have 10 staffers or less and over 
half of my members have budgets of a million dollars or less. 
So we do not have a whole lot of resources to chase after. That 
is why we support continuing these structural protections, to 
prevent the harm from happening in the first place.
    So, yes, books and records are important. We believe there 
would be some holes in that. But, even if there were not, it 
would be difficult to regulate multistate holding companies 
because of limited resources.
    Senator Corzine. What are some of those exemptions? Are 
there specifics that you were alluding to here?
    Mr. Acquard. I would be happy to file that with you.
    Senator Corzine. It strikes me that the overlapping 
regulation may very well be part of the problem in the ability 
to actually get at the kinds of consumer protections you want 
because I am not clear who has responsibility here.
    We need to make sure that the law has that ability, in my 
view, to get at books and records adequately. And I would be 
concerned that your argument is that it is not adequate.
    Senator Enzi. Senator Bunning.
    Senator Bunning. Thank you, Senator Enzi.
    Mr. Acquard, it is extremely rare that a Federal agency 
willingly concedes regulatory authority or oversight to another 
agency.
    Why would the SEC willingly concede jurisdiction to FERC if 
there is such concerns about PUHCA repeal? Why do the SEC and 
FERC not share the same concerns that you have?
    Mr. Acquard. Well, concerning the SEC willing to give up 
their authority to the FERC, I think the SEC has always been a 
bit uncomfortable regulating the Public Utility Holding Company 
Act because they are essentially a securities regulator.
    So much more of the Act has to do with energy policy than 
just securities regulation. So I think they see it that FERC, 
because they have the knowledge to deal with the energy issues, 
that they would be a better regulator of that. And we would not 
disagree with that.
    One of the positive things about the legislation is 
shifting some of the authority from the SEC to the FERC. The 
SEC has not done a very good job regulating the Act.
    But the beauty of the Act is that it prevents these 
activities, these corporate structures, from taking place in 
the first place, so that the SEC never had to do anything and 
it still works. So as far as the FERC believing that they have 
adequate authority, you will have to ask them.
    Senator Bunning. We just did. And they just said that they 
had adequate authority.
    Mr. Acquard. We would disagree.
    Senator Bunning. You disagree.
    Mr. Acquard. And it is not just us. I think the letter that 
was sent to the Subcommittee to the commissioners, they say 
there are some limits of authority. And there is a list of a 
whole bunch of groups, from the AFL-CIO----
    Senator Bunning. I understand that. I can get you a list 
from the other side that says that we should repeal this and 
repeal it promptly. So we do not want to get into that debate. 
You are not going to win and I am not going to win on that 
debate because we will match the same list.
    Let me also ask----
    Senator Shelby. Senator Bunning, I believe you would win.
    [Laughter.]
    Senator Bunning. You think I would win? Because I would get 
the last word?
    [Laughter.]
    Let me ask a question to our other two witnesses. In your 
companies, what portion of your power production is in natural 
gas, nuclear, and coal-fired generation?
    Either one.
    Mr. Sokol. Let me start. Roughly 15 percent of our 
generation is nuclear.
    Senator Bunning. Fifteen?
    Mr. Sokol. Yes. 45 percent is coal. Roughly 25 percent is 
gas. And the remainder is renewable energy.
    Senator Bunning. In other words, renewable energy being 
hydroelectric?
    Mr. Sokol. Geothermal and wind.
    Senator Bunning. Okay.
    Mr. Sparby. Sir, for Xcel energy, it is a little more than 
50 percent by coal, about 30 percent of our megawatt hours are 
nuclear, the rest is purchases, as well as renewable energy.
    Senator Bunning. Let me ask, can we get back to the 
California debacle? We talked about some problems that PUHCA 
might have played in the exacerbation of the problem there.
    But didn't the local jurisdiction, their local regulatory 
commission in California, cap retail rates and let wholesale 
rates go unfettered? In other words, to seek the level of 
competitive advantage 
or disadvantage?
    Mr. Acquard. Yes.
    Senator Bunning. Wasn't that more of a problem than 
anything else that might have occurred in California?
    Mr. Acquard. There were a number of problems that occurred. 
But that was one of the major ones, yes.
    Senator Bunning. And now, we are looking at approximately a 
40-percent increase in retail rates to match those costs that 
the wholesale rates have created.
    If in fact, California would not have reduced production of 
energy in California and made the decision to go outside of 
California to buy their power, don't you think that would have 
at least alleviated some of the problems that they are having 
there?
    Mr. Acquard. That would have. But I do not think that is 
necessarily a holding company issue.
    Senator Bunning. No, no. It is not a holding company--I am 
trying to concentrate on California and the problem that they 
had by not being able to go in due to PUHCA and not compete 
for, because they were certainly based in a different area.
    Mr. Acquard. Well, I would look at the California crisis, 
if you look at sort of the broad scope, is that it is an 
instance where there was deregulation or the consumer 
protections of regulation were removed before there was a 
vibrant competitive market, and that might have caused some of 
the problems.
    And that is sort of what we are talking about here with the 
Public Utility Holding Company Act. We do not have a vibrant 
wholesale market and we are talking about removing some of the 
consumer protections found in PUHCA. We believe it is 
premature.
    Senator Bunning. We disagree that there is a vibrant 
wholesale market and by repealing, we will have a more vibrant 
one.
    Thank you, Senator Enzi.
    Senator Enzi. Senator Shelby.
    Senator Shelby. Mr. Sokol, Mr. Sparby, just for a minute 
hazard a guess, if you would, as to how much your industry has 
changed since PUHCA was enacted in 1935. I would hazard myself 
that neither one of you were born then.
    Mr. Sokol. I think you are correct for both of us.
    Senator it has changed as much as the computer industry has 
changed in the last 20 or 30 years.
    Senator Shelby. Absolutely. I think it is important for you 
two to put this in a current context. Go ahead. I did not mean 
to interrupt you.
    Mr. Sokol. I think some simple examples would be that 
electricity is produced today with one half the amount of raw 
energy, whether it is natural gas, coal or others, than it took 
just 30 years ago in modern technology.
    Senator Shelby. Yes.
    Mr. Sokol. The majority of that has been caused by, in 
fact, legislation passed in the late 1970's which created a 
level of generation competition in this country.
    Senator Shelby. You are talking about PURPA.
    Mr. Sokol. Correct. The other thing that has happened is, 
virtually every State--well, every State in the country today 
has a regulatory body that oversees regulated activity in that 
State of electric and gas. Now that did not exist in 1935. And 
there are a number of other examples.
    If I might just take one moment and defend the SEC staff in 
their activities in handling PUHCA in the last 10 years during 
dramatic change.
    That law, if it is read in its entirety, makes no sense 
today. It regulates an industry that ended in 1965, in our 
view. But the SEC has done a tremendous job of trying to find 
ways to work around it. But the reality is that those ways----
    Senator Shelby. Needs some legislation. And that is what 
they are saying here, is not it?
    Mr. Sokol. They absolutely do, yes, sir.
    Senator Shelby. Mr. Sparby.
    Mr. Sparby. Yes, Senators Enzi, and Shelby.
    Senator Shelby. I know you were not around in 1935.
    [Laughter.]
    Mr. Sparby. Well, that is very kind for you to say that.
    That Act contemplated very much an isolated, vertically 
integrated industry that looked very much unlike what we have 
today--an industry that is much more aggregated and organized 
in a horizontal fashion, as well as much more interconnected 
and regional than that Act's drafters could have ever imagined.
    Senator Shelby. In 1935, I am sure the people that enacted 
the legislation then could never imagine the production of 
electricity that you alluded to a minute ago, with half the raw 
materials, and so forth, could they?
    Mr. Sokol. The electricity industry was in its infancy in 
the late 1920's, early 1930's. And the reality is, the history 
of the 1935 Act was in response to some very devious steps that 
were taken after the beginnings of the Depression for people to 
try and use utility assets to offset losses in their holding 
companies elsewhere in their empires, if you will. And the Act 
was a direct response to that and it was an appropriate one at 
the time.
    That cannot exist today. We fully support the books and 
records issues. Those elements of our business that are 
regulated must be available to public regulators to be 
absolutely certain that customers are protected because it is 
an essential service.
    Our industry has no issue with that at all. In fact, our 
shareholder, Mr. Buffett, said it very well last year when he 
said the utility industry can never be a great business. It 
should only be a good business if it is run well because 
everybody depends upon it.
    In the State of Iowa----
    Senator Shelby. But it is essential to our economy, isn't 
it?
    Mr. Sokol. It is absolutely essential. In the State of 
Iowa, all of our books and records, the holding company and 
their regulated utility, are available to that regulator. They 
should be and we have no opposition to every State having that. 
And I believe today virtually every State does have that 
requirement.
    Senator Shelby. Mr. Acquard, Ms. Marlette earlier, I think 
you were here, the FERC's witness today, felt that FERC would 
be able to protect rate-payers upon repeal of PUHCA.
    Do you differ with that?
    Mr. Acquard. Well, I think FERC has a role implanted. But I 
do not think they have the adequate authority that they need, 
nor do the States. And again, I would like to emphasize that I 
think you have a letter from the State regulators themselves 
saying that you need some additional things.
    I was also interested to hear----
    Senator Shelby. I would have to agree with you. I think the 
State regulators do have a role.
    Mr. Acquard. Right.
    Senator Shelby. And I think Mr. Sokol and Mr. Sparby 
alluded to that, didn't you?
    Mr. Sokol. Absolutely.
    Mr. Acquard. I was interested in the testimony from the 
SEC, however, saying that maybe some additional authority is 
needed to check on cross-subsidies and other sort of market 
power abuse. And we would be delighted to work with the SEC and 
with this Committee to come up with some on this legislation.
    Senator Shelby. Isn't more capacity generally one of the 
keys, maybe not the only key, and adequate distribution, to 
bring the prices down?
    It is in just about everything else. If you look at energy 
as a commodity, the more capacity you have, the better 
distribution you have, that brings competition in itself, in a 
way, doesn't it, Mr. Sparby?
    Mr. Sparby. Absolutely. We have seen markets, Senator 
Shelby, that have benefited significantly by not having just 
enough generation, but having enough generation that we have a 
truly robust and vibrant and competitive wholesale market. And 
that is the target we are shooting for.
    Senator Shelby. Thank you very much, Senator Enzi.
    Senator Enzi. Thank you.
    Senator Shelby. For holding this hearing, too.
    Senator Enzi. We appreciate you bringing the issue to the 
Committee so that we could have the hearing. And I want to 
congratulate you on your efforts.
    Senator Shelby. Thank you.
    Senator Enzi. Senator Bayh

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Thank you, Senator Enzi.
    I would like to thank all three of our witnesses for coming 
here today to appear before this Committee. I apologize. I 
missed the first part of your testimony.
    I had, as is usual in the Congress, a variety of issues 
trying to juggle at one time--education reform, campaign 
finance reform, as well as some others. So I do appreciate your 
time.
    I have three very brief questions. First, Mr. Acquard, you 
have spoken with great passion about the importance of 
protecting the consumer interest, which of course is something 
that we would all be interested in.
    We have also heard testimony from Mr. Sokol that in his 
company's case, this PUHCA actually prevented them from making 
some important investments in California that at least in part 
might have helped to alleviate some of the problems that exist 
there today. I assume that there are other companies similarly 
situated that might have made similar investments. Given that 
as a fact, how is such a restriction in the consumer interest?
    Mr. Acquard. Well, again, it goes back to--in this specific 
case, it may have been a problem. It may have caused some 
problems in California. But if you look at the overall, as far 
as corporate structural restrictions, we believe that those 
restrictions are as important today as they were 65 years ago, 
when the Act was enacted during the Depression.
    Those are the sort of--holding companies, by their very 
nature, are difficult to regulate. And once you form a holding 
company type system and you move from just an intrastate 
utility to an interstate utility, that becomes very difficult 
to regulate.
    Will Rogers used to say that a holding company is where you 
stash the goods when the police frisk you down.
    [Laughter.]
    I think there is some truth to that. I would say that, 
while there are instances where perhaps there may be an 
impediment to doing some good things, overall, the structure is 
better for consumers.
    Senator Bayh. My mother is from Oklahoma. I know a thing or 
two about Will Rogers. He also once said, if my colleagues will 
forgive me, that you can lead a man to Congress, but you cannot 
make him think.
    [Laughter.]
    So perhaps we should quote Will Rogers with some----
    Senator Shelby. Anything.
    Senator Bayh. That is right. In any event, just a couple of 
other questions. I think Senators Bunning, and Shelby alluded 
to this. You have answered my question in part about the 
adequacy of current State and SEC regulation.
    I gather the FERC and the SEC witnesses--previously, I know 
they have. I gather today they reiterated their belief that the 
current State structure is sufficient. And you suggested that 
there was a letter from the State regulators. I have not had a 
chance to read this letter.
    If you have, Mr. Acquard, what about the current regulatory 
scheme, since the SEC and the FERC seem to believe it is 
adequate, what about the scheme is inadequate?
    Mr. Acquard. The current scheme?
    Senator Bayh. The current scheme of State regulations that 
has grown up over the years, the FERC's ability. I gather the 
State regulators believe it is inadequate.
    Do you share their view that it is inadequate?
    What about it is inadequate?
    Mr. Acquard. Right. Well, I believe--and it is hard for me 
to speak for the State regulators. I was surprised not to see a 
representative from the State commissions up here today.
    What the commissions are saying, I believe, is that if you 
do repeal the Holding Company Act and you do allow a growth of 
holding companies--and you will see that that is guaranteed--
then their job is going to get more difficult. It is difficult 
as it is now. It is only going to get worse if the Act is 
repealed.
    Senator Bayh. My final question would be to Mr. Sokol and 
Mr. Sparby. Could you respond to Mr. Acquard's comments about, 
if PUHCA is repealed, his belief that the consumers would be 
left on the hook here?
    Could you give us your insights into why you think----
    Mr. Sokol. With all due respect, it is a complete red 
herring.
    We are a holding company today. We hold a utility in the 
State of Iowa that services small territories in South Dakota, 
Illinois and Nebraska. The State has full access to books and 
records. The State completely ring-fences the utility assets in 
Iowa. We cannot, nor can any other utility in the United States 
that we are aware of, pledge utility-regulated assets to 
support any credit activity in any other part of the holding 
company.
    The only thing we cannot do today is own another utility in 
another State. We can own any other type of company. We can do 
virtually anything else we want to do.
    The States do very carefully oversee the fact that we 
cannot move assets out of Iowa, nor should we be allowed to. 
The consumers effectively own those assets through their rates. 
It is not an issue.
    One issue, though, and you alluded to it earlier in your 
comments, that is very important, is that the conflict today 
between PUHCA, regional transmission operating companies, and 
FERC Order 2000, they are directly in conflict. They shouldn't 
be because we desperately need--one of California's problems, 
no question, they created the problem themselves.
    But to help California get out of the problem, transmission 
corridors are absolutely essential. And virtually no one 
outside the State of California can invest and solve that 
problem under today's regulations. And that is a serious 
mistake.
    Senator Bayh. Thank you very much. Mr. Sparby, briefly. I 
see my time is expired.
    Mr. Sparby. Yes, Senator Bayh. I agree that there are no 
holes here created by this bill.
    The appropriate State or regulator has full authority here 
to take a look at what costs go into rates. They have done that 
in the past. They will continue to do that after the passage of 
this bill. And I agree that there is certainly nothing 
presented here, nor nothing suggested, to make us think 
otherwise.
    Senator Bayh. Thank you, gentlemen.
    I would just say in conclusion, so much has changed. I 
guess Senator Gramm has left. Not only was I not in existence in 
1935, I am not sure my parents were in existence in 1935 when the 
rate was adopted.
    So much has changed since then. We are going to have a 
national, in some cases, global, marketplace for energy. And I 
think that one of the lessons coming out of California is you 
believe in markets or you do not.
    Mr. Acquard, I believe your point about the importance of 
efficient, robust markets is accurate. But they come in all 
sizes, shapes and descriptions, depending upon the 
particularities of the marketplace we are talking about.
    More investment, more participants are going to provide, in 
the long run, better choices for consumers, better quality 
products at lower cost. And I have to say that, in many 
respects, it is my impression that this legislation is 
antiquated and is keeping us from achieving some of those 
objectives.
    While I share your commitment to the consumer interest, I 
think in the long run, a robust, open free market is going to 
in most cases get us to that consumer interest, without being 
naive that in some circumstances, important protections need to 
be maintained.
    Thank you, Senator Enzi.
    Senator Enzi. Since I deferred to Senator Gramm, I still 
have my opportunity to ask questions here.
    And I would like to welcome Mr. Sparby to Wyoming. You are 
a new owner of an old business--Cheyenne Light Fuel and Power 
has been one of the old companies.
    Many people probably do not realize that Wyoming was the 
first State to have a town with incandescent street lights. 
That is right up there with the other firsts that Wyoming has 
that people also do not know about.
    [Laughter.]
    But one of the city's main points to attract businesses has 
been its low-cost power. Beginning in February, reports started 
coming in that Cheyenne electricity rates would possibly more 
than double overnight.
    I know that your company just recently purchased Cheyenne 
Light Fuel and Power. But I am also aware that your company was 
involved in the negotiations when the contracts with PacifiCorp 
expired in December. And your company will be responsible for 
negotiating the rate increases with the Wyoming Public Service 
Commission. Would the repeal of PUHCA make any difference to 
the Cheyenne consumers?
    Mr. Sparby. Senator Enzi, I believe it would over the long 
run. The difficulty with the energy supply today is that it is 
hindered by numerous limitations, none of which you can point 
to and say, would the repeal or the amendment of that 
modification fix today's energy shortfall?
    But looking at each one of these regulations, addressing 
them individually and doing it as soon as possible, I believe 
will result in lower costs and more generation over the long 
run.
    Senator Enzi. Do you think that Wyoming will be able to 
adequately administer the regulation when PUHCA is repealed?
    Mr. Sparby. Yes, I do, Senator. I have found that the 
Wyoming commission has been very aggressive about its ability 
and inquiries into not only this proposed rate change, but all 
others, and have not been inhibited, nor found limitations that 
I am aware of, imposed by PUHCA.
    Senator Enzi. Mr. Acquard, you mentioned Will Rogers. I do 
not think that Will Rogers ever had to work with FERC.
    [Laughter.]
    In your testimony, you first said that S. 206 does not have 
adequate regulation. And then you said that it increases the 
regulatory burden.
    Do you want to explain that conflict?
    Mr. Acquard. Well, I believe what I said is that S. 206, by 
repealing the Public Utility Holding Company Act, submits these 
companies to the regulations of each 50 States. And so, that 
would increase the burdens on the utilities.
    Senator Enzi. One of the things that was mentioned both by 
FERC and the SEC earlier was the redundancy that there is in 
regulation by having this now.
    Doesn't that redundancy cost consumers?
    Mr. Acquard. There may be some redundancy in the Act. And 
again, we are not opposed to reform of the Act. However, we do 
believe that there continues to be a Federal role in the 
regulation of multistate holding companies. And that 
redundancy, we believe, does have consumer benefits, if there 
is any.
    Senator Enzi. Mr. Sokol, one of the biggest fears that I 
hear from PUHCA repeal opponents is that PUHCA repeal will lead 
to the acquisition of utilities by nonutility companies and 
that that would lead to some abuses of transferring the costs 
of one company to rate-payers that PUHCA was initially created 
to avoid. If we repeal PUHCA, is that going to happen? Will my 
constituents in Wyoming end up paying more?
    Mr. Sokol. Senator, not to let my cohort here be outdone, I 
am a homeowner in the great State of Wyoming and we buy about 
$75 million of your fine coal each year, so as a constituent 
the answer is no. In fact, PUHCA has created the odd situation, 
again, unintended consequences of legislation being allowed to 
exist too long. But it has created the odd situation of really 
the only M&A or merger and acquisition activity going on in our 
industry is among the industry because investors like a 
Berkshire Hathaway are prohibited from owning more than a 10-
percent piece in one utility. And so, I think you are actually 
seeing the opposite problem happen, which is a rather 
incestuous relationship without additional capital coming in.
    And frankly, in the last 2 years, the greatest amount of 
capital coming into our sector is from foreign owners, not U.S. 
owners. So, no, I do not think there is any concern or real 
issue about cross-subsidization. And by the way, it should be 
completely prohibited. We have no interest in the consumer 
paying more than they should by that consolidation.
    On the other hand, this is an industry that, as has been 
mentioned, has gone through phenomenal change, but with very 
few additional players in it. That is not very healthy, we do 
not think.
    Senator Enzi. My daughter has even been following those 
changes just since the 12 years ago that she was introduced to 
it.
    [Laughter.]
    So I do appreciate the testimony of all of you today and 
the way that you have helped to build a record on this 
important issue.
    Senator Shelby, did you want to make a concluding remark?
    Senator Shelby. No, thank you, Senator Enzi.
    Senator Enzi. We will leave the record open in case anybody 
has additional questions for you, and we would appreciate any 
answers promptly from you when you get those.
    Thank you, for your participation. The hearing is 
adjourned.
    Mr. Acquard. Thank you.
    Mr. Sokol. Thank you.
    Mr. Sparby. Thank you, Senator Enzi.
    [Whereupon, at 11:40 a.m., the hearing was adjourned.]
    [Prepared statements, and additional material submitted for 
the record follow:]

               PREPARED STATEMENT OF SENATOR WAYNE ALLARD

    Senator Enzi, I would like to thank you for holding this important 
hearing on the conditional repeal of the Public Utilities Holding 
Company Act. As you know, this has been an issue that the Subcommittee 
has been working on for a number of years now.
    I believe that this legislation accomplishes what should be our 
goal in many areas: it consolidates regulation and eliminates 
duplication while strengthening consumer protection. Currently, we are 
faced with increasingly difficult choices regarding energy. I support 
options to promote competition and increase innovation within the 
industry, and repeal of PUHCA is a good step in that direction.
    The Securities and Exchange Commission, the agency charged with 
enforcing this Act, has recommended that the Act be repealed. I find 
this particularly telling, since it is so rare that a Federal agency 
actually recommends that its regulatory authority be curtailed!
    I look forward to hearing from the SEC and other witnesses about 
their ideas on what can be done to improve the situation for the energy 
industry. I would like to especially welcome Mr. David Sparby, who is 
the Vice President for, Regulatory and Government Affairs at Xcel 
Energy. Xcel provides power for many of my constituents, and I look 
forward to working with David on this and other issues that are 
important to the people of Colorado.
    Again, thank you all for being here. I look forward to your 
testimony.

                               ----------

               PREPARED STATEMENT OF SENATOR JIM BUNNING

    Senator Enzi, I would like to thank you for holding this hearing, 
and express my support for S. 206, The Public Utility Holding Company 
Act of 2001.
    PUHCA was passed in 1935. Many feel that it is an outdated, 
duplicative, law. The original bill was designed to break up the high 
concentration of market power among a few holding companies. PUHCA has 
done that. But now there are only a few energy companies that are 
subject to PUHCA, while many others are not. Many believe PUHCA repeal 
will lower costs and allow the companies currently under, to grow and 
diversify. They believe it will eliminate burdensome regulations and it 
will allow the PUHCA holding companies to compete more effectively.
    The Securities Exchange Commission (SEC) supports repealing PUHCA 
and shifting the regulatory oversight to the Federal Energy Regulatory 
Commission (FERC). If the SEC says FERC is the more appropriate 
regulatory agency, I think that is a pretty telling endorsement. I also 
believe that FERC, along with State public service commissions, can 
protect utility rate-payers and investors.
    However, I do understand there are some concerns about repealing 
PUHCA and turning over the Securities Exchange Commission's regulatory 
powers to the Federal Energy Regulatory Commission. State regulators, 
consumer groups and Kentucky heating and electrical contractors have 
voiced their reservations about passing PUHCA as a stand-alone bill. I 
have heard their concerns and I will listen to the testimony today with 
great interest as I decide whether S. 206 is in the best interest of 
Kentucky.
    Once again, thank you, Senator Enzi for holding this important 
hearing.

                               ----------

            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Enzi and Ranking Member Dodd, I want to thank you for 
holding this hearing today concerning S. 206, the Public Utility 
Holding Company Act of 2001.
    This bill, which the Subcommittee has passed with bipartisan 
support in each of the last few Congresses, was developed in close 
consultation with the Securities and Exchange Commission, the Federal 
Energy Regulatory Commission and the State's Public Service 
Commissions.
    S. 206 is designed to help America's energy consumers by repealing 
an antiquated law that is keeping the benefits of competition from 
reaching our citizens. Recent events across the country make it very 
clear that we are at a time in our Nation's history when we are going 
to have to make some critical choices regarding our national energy 
policy.
    The fact is, future technological innovation and economic growth is 
contingent upon this country's ability to meet its ever increasing 
demand for energy. In order to do this, we need to modernize production 
systems, increase market competition, and strip away unnecessary 
regulations. Achieving these goals is going to be a difficult and time 
consuming process.
    However, repealing PUHCA would be the first step in the right 
direction. It has been a very long time since it first became clear 
that this outdated, Depression-era law had become a unnecessary 
constraint on the ability of American gas and electric utilities to 
compete. While the many bipartisan efforts to repeal PUHCA have not 
been successful, strong support still exists for its elimination. I 
believe that it is imperative that we achieve this goal in the 107th 
Congress. Thank you.

                               ----------

                PREPARED STATEMENT OF ISAAC C. HUNT, JR.

         Commissioner, U.S. Securities and Exchange Commission

                             March 29, 2001

    Senator Enzi, Ranking Member Dodd, and Members of the Subcommittee: 
I am pleased to have this opportunity to testify before you on behalf 
of the Securities and Exchange Commission (``SEC'') about S. 206, a 
bill that would repeal the Public Utility Holding Company Act of 1935 
and establish a more limited regulatory framework covering public 
utility holding companies. The SEC continues to support repeal of the 
Public Utility Holding Company Act of 1935 (``1935 Act'' or ``PUHCA''). 
Repeal, however, should be accomplished in a manner that eliminates 
duplicative regulation while also preserving important protections for 
consumers of utility companies in multistate holding company systems.
Introduction
    During the first quarter of the last century, misuse of the holding 
company structure led to serious problems in the electric and gas 
industry. These abuses included inadequate disclosure of the financial 
position and earning power of holding companies, unsound accounting 
practices, excessive debt issuances and abusive affiliate transactions. 
The 1935 Act was enacted to address these problems.\1\ Because of its 
role in addressing issues involving securities and financings, the SEC 
was charged with administering the Act. In the years following the 
passage of the 1935 Act, the SEC worked to reorganize and simplify 
existing public utility holding companies in order to eliminate abuses.
---------------------------------------------------------------------------
    \1\ See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
---------------------------------------------------------------------------
    By the early 1980's, however, many aspects of 1935 Act regulation 
had become redundant: State regulation had expanded and strengthened 
since 1935, and the SEC had enhanced its regulation of all issuers of 
securities, including public utility holding companies. Changes in the 
accounting profession and the investment banking industry also had 
provided investors and consumers with a range of protections unforeseen 
in 1935. The SEC therefore concluded that the 1935 Act had accomplished 
its basic purpose and that many of its remaining provisions were either 
duplicative or were no longer necessary to prevent the recurrence of 
the abuses that had led to the Act's enactment. The SEC thus 
unanimously recommended that Congress repeal the Act.\2\
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    \2\ See Public Utility Holding Company Act Amendments: Hearings on 
S. 1869, S. 1870 and 
S. 1871 Before the Subcomm. On Securities of the Senate Comm. On 
Banking, Housing, and Urban Affairs, 97th Cong., 2d Sess. 359-421 
(statement of SEC).
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The SEC's Study and the Current Environment
    For a number of reasons--including the potential for abuse through 
the use of a multistate holding company structure, related concerns 
about consumer protection, and the lack of a consensus for change--
repeal legislation was not enacted during the early 1980's. Because of 
continuing change in the industry, however, the SEC continued to look 
at ways to administer the statute more flexibly.
    In response to continuing changes in the utility industry during 
the early 1990's, and the accelerated pace of those changes, in 1994, 
then-Chairman Arthur Levitt directed the SEC's Division of Investment 
Management to undertake a study, under the guidance of then-
Commissioner Richard Y. Roberts, to examine the continued vitality of 
the 1935 Act. The study was undertaken as a result of the developments 
noted above and the SEC's continuing need to respond flexibly in the 
administra-
tion of the 1935 Act. The purpose of the study was to identify 
unnecessary and 
duplicative regulation, and at the same time to identify those features 
of the 
statute that remain appropriate in the regulation of the contemporary 
electric and 
gas industries.\3\
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    \3\ The study focused primarily on registered holding company 
systems, of which there were, at the time of the study, 19. The 1935 
Act was enacted to address problems arising from multistate operations, 
and reflects a general presumption that intrastate holding companies 
and certain other types of holding companies which the 1935 Act exempts 
and which now number 119, are adequately regulated by local 
authorities. Despite their small number, registered holding companies 
account for a significant portion of the energy utility resources in 
this country. As of December 31, 2000, the 26 registered holding 
companies owned 214 electric and gas utility subsidiaries, with 
operations in 44 States, and in excess of 1,500 nonutility 
subsidiaries. In financial terms, as of December 31, 2000, the 30 
registered holding companies owned more than $404 billion of investor-
owned electric and gas utility assets and received in excess of $160 
billion in operating revenues. The 30 registered holding companies 
represent over 40 percent of the assets and revenues of the U.S. 
investor-owned electric utility industry, and almost 50 percent of all 
electric utility customers in the United States.
---------------------------------------------------------------------------
    The SEC staff worked with representatives of the utility industry, 
consumer groups, trade associations, investment banks, rating agencies, 
economists, State, local and Federal regulators, and other interested 
parties during the course of the study. In June 1995, a report of the 
findings made during the study (``Report'') was issued. The staff's 
Report outlined the history of the 1935 Act, described the then-current 
state of the utility industry as well as the changes that were taking 
place in the industry, and again recommended repeal of the 1935 Act. 
The Report also outlined and recommended that the Commission adopt a 
number of administrative initiatives to streamline regulation under the 
Act.
    The utility industry in the United States has continued to undergo 
rapid change since publication of the report. Some of these changes 
have been facilitated by Congress. Specifically, as a result of 
recently-created statutory exemptions, registered holding companies are 
now free to own exempt wholesale generators and foreign utilities and 
to engage in a wide range of telecommunication activities.\4\ In 
addition, the SEC has implemented many of the administrative 
initiatives that were recommended in the Report.\5\
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    \4\ Sections 32 and 33 of the Act, which were added to it by the 
Energy Policy Act of 1992, permit, subject to certain conditions, the 
ownership of exempt wholesale generators and foreign utility companies. 
Section 34, which was added by the Telecommunications Act of 1996, 
permits holding companies to acquire and retain interests in companies 
engaged in a broad range of telecommunications activities.
    \5\ The Report recommended rule amendments to broaden exemptions 
for routine financings by subsidiaries of registered holding companies 
(see Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 33640 
(June 28, 1995)) and to provide a new exemption for the acquisition of 
interests in companies that engage in energy-related and gas-related 
activities (see Holding Co. Act Release No. 26667 (Feb. 14, 1997), 62 
FR 7900 (Feb. 20, 1997) (adopting Rule 58)). In addition, the Report 
recommended and the SEC has implemented changes in the administration 
of the Act that would permit a ``shelf'' approach for approval of 
financing transactions. For example, during calendar year 2000, all 11 
of the new registered holding companies received multiyear financing 
authorizations that included a wide range of debt and equity 
securities. The Report also recommended a more liberal interpretation 
of the Act's integration requirements which have been carried out in 
our merger orders. The Report also recommended an increased focus upon 
auditing regulated companies and assisting State and local regulators 
in obtaining access to books, records and accounts. Six State public 
utility commissions participated in the last three audits of the books 
and records of registered holding companies.
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    There has nonetheless been increased activity under the 1935 Act, 
especially in the area of mergers and acquisitions, corporate 
restructuring, diversification and affiliate transactions. The industry 
has also experienced an accelerating pace of initiatives at the State 
level to foster competition and the implementation of initiatives at 
the FERC to address open transmission and related structural issues. 
Finally, the internationalization of the industry has continued. In 
addition to the foreign investments of U.S. utilities, during the past 
2 years, three British utility companies have acquired American 
utilities and subsequently registered under the Act.\6\ A Canadian 
utility has also announced its plans to acquire a utility in the United 
States.\7\ At the same time, problems have arisen in the electric 
industry. The electricity shortages, price increases and rolling 
blackouts experienced in California represent some of the most severe 
problems. Specifically, in California, acute supply shortages, opposition 
and legal impediments to new power plant construction and high natural 
gas prices have driven wholesale electricity prices to extraordinary 
levels. The two largest California utilities have not been allowed to 
pass wholesale price increases through to consumers and, as a result, 
are experiencing severe liquidity problems. They have stated publicly 
that they may file for bankruptcy. Some industry experts, as well as a 
number of press reports, have speculated that other areas of the country 
may experience similar problems this summer. With these issues further 
complicating already complex questions, energy reform legislation is 
again being considered in this Congress. Repeal of PUHCA is once again 
part of this discussion.
---------------------------------------------------------------------------
    \6\ The three British companies that have made acquisitions in the 
United States and are currently registered under the Act are National 
Grid Group plc, Scottish Power plc and PowerGen plc. See Holding Co. 
Act Release No. 27154 (Mar. 15, 2000) (authorizing National Grid's 
acquisition of New England Electric System); Holding Co. Act Release 
No. 27166 (Apr. 14, 2000) (authorizing National Grid's acquisition of 
Eastern Utility Associates); Holding Co. Act Release No. 27290 (Dec. 6, 
2000), corrected by Holding Co. Act Release No. 27292 (Dec. 7, 2000) 
(authorizing Scottish Power to engage in certain financing transactions 
following its acquisition of PacifiCorp and registration under the 
Act); Holding Co. Act Release No. 27291 (Dec. 6, 2000) (authorizing 
PowerGen's acquisition of LG&E Energy Group); Holding Co. Act Release 
No. 27312 (Dec. 21, 2000) (authorizing proxy solicitation in connection 
with National Grid's proposed acquisition of Niagara Mohawk).
    \7\ Emera Inc., the owner of Nova Scotia Power, has announced a 
deal to acquire Bangor Hydro-Electric Company and has applied for an 
order approving the transaction. See SEC File No. 70-9087 (application 
filed Nov. 6, 2000).
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Current Proposals to Repeal the 1935 Act
    Repeal of the 1935 Act may be accomplished either separately or as 
part of a more comprehensive package of energy reform legislation. S. 
206 would repeal the Act on a stand-alone basis.
    Based on the findings in the Report as well as the continuing pace 
of change in the utility industry, the SEC has recommended, and 
continues to recommend, that Congress repeal the 1935 Act. The SEC does 
not have a preference as to whether the Act is repealed on a stand-
alone basis or as part of broader, energy-related legislation. However, 
the SEC does recommend the enactment of legislation to provide 
necessary authority to the Federal Energy Regulatory Commission 
(``FERC'') and the State public utility commissions relating to 
affiliate transactions, audits and access to books and records, for the 
continued protection of utility consumers. As the Report stated, 
regulation under the 1935 Act that affects the ability of holding 
company systems to issue securities, acquire other utilities, and 
acquire nonutility businesses is largely redundant in view of other 
existing regulation and controls imposed by the market. There is, 
however, a continuing need to protect consumers.
    Although deregulation is changing the way utilities operate in some 
States, electric and gas utilities have historically functioned as 
monopolies whose rates are regulated by State authorities. Some 
regulators subject these rates to greater scrutiny than others. There 
is a continuing risk that a monopoly, if left unguarded, could charge 
higher rates and use the additional funds to subsidize affiliated 
businesses in order to boost its competitive position in other markets. 
Thus, so long as electric and gas utilities continue to function as 
monopolies, the need to protect against this type of cross-
subsidization will remain. In view of the sophistication of 
contemporary securities regulation, and analysis by the public and 
private sectors, the best means of guarding against cross-subsidization 
is likely to be audits of books and records and Federal oversight of 
affiliate transactions.
    S. 206 represents a form of this type of conditional repeal--the 
type of conditional repeal that the SEC has endorsed. In particular, S. 
206 would provide the FERC with the right to examine books and records 
of holding companies and their affiliates that are relevant to costs 
incurred by associate utility companies, in order to protect 
ratepayers. S. 206 would also provide an interested State commission 
with access to such books and records (subject to protection for 
confidential information), if they are relevant to costs incurred by 
utility companies subject to the State commission's jurisdiction and 
are needed for effective discharge of the State commission's 
responsibilities in connection with a pending proceeding. Finally, S. 
206 would provide a transition period in which States, utilities and 
other parties affected by the change in the regulatory structure could 
prepare for the new framework. S. 206 thus accomplishes many of the 
goals of the conditional repeal advocated by the SEC.
    Repealing the Act is not, however, a magic solution to the current 
problems facing the U.S. utility industry. While PUHCA repeal can be 
viewed as part of the needed response to the current energy problems 
facing the country, repeal of the Act will not directly affect the 
supply of electricity in the United States. Indeed, in 1992, as part of 
the Energy Policy Act, Congress amended the Act to remove most 
restrictions on the ability of registered and exempt holding companies 
as well as nonutility companies to build, acquire and own generating 
facilities anywhere in the United States. As a result, a number of 
registered holding companies now have large subsidiaries that own 
generating facilities nationwide. Repeal of the Act would instead 
remove provisions that prohibit utility holding companies from owning 
utilities in different parts of the country and that prevent nonutility 
businesses from acquiring regulated utilities.
    Repeal of the Act would thus likely have the greatest impact on 
both the continuing consolidation of the utility business as well as 
the entry of new companies into the utility business. As outlined 
above, the SEC's primary concern with repeal is how consumers will be 
protected in this new environment. The SEC urges that S. 206 be amended 
to include provisions giving the FERC the authority it needs to oversee 
transactions among affiliates in holding company systems. Provisions 
granting access to books and records provide the FERC and the State 
commissions with the authority they need to identify affiliate 
transactions, review their terms and evaluate their effects on utility 
costs and rates. Nonetheless, the potential for cross-subsidization and 
consequent detriment to consumers remains, and the SEC believes it is 
important that the FERC have the flexibility to engage in more 
extensive regulation if necessary.
    The current situation in California illustrates this need. 
California's problems have been caused by, among other things, the need 
to construct additional generating capacity and perhaps additional 
transmission facilities. It is unclear whether repeal of the 1935 Act 
would have any real effect, positive or negative, on these problems. 
However, another component of California's problems is the precarious 
financial condition of the State's utilities. While the cost of 
acquiring power has had a significant impact on the financial condition 
of California's utilities, there have been suggestions in the press and 
elsewhere that these utilities' financial problems were exacerbated by 
their holding companies' decisions to use the profits of their 
regulated utility subsidiaries to finance investments in unregulated 
businesses. Regardless of whether these suggestions are true--the 
holding companies that own California's utilities are currently exempt 
from most provisions of the 1935 Act and are thus largely unregulated 
by the SEC--the potential for abuses of this type demonstrates the need 
to give State and/or Federal regulators unfettered access to the books 
and records of holding companies so that they can develop a full 
understanding of the types of transactions occurring within the holding 
company. Moreover, because similar types of abuses can occur through 
affiliate transactions that cross-subsidize unregulated businesses with 
the profits of regulated utilities, regulators need the authority to 
review and analyze all transactions within a holding company system and 
prohibit those that pose unreasonable risks for utility ratepayers. The 
SEC therefore continues to support a broader grant of authority to the 
FERC to oversee these types of transactions including, if the FERC 
deems it appropriate, the authority to pre-review and pre-approve 
affiliate transactions.
    Questions have also arisen about how the Act, if not repealed, will 
impact the FERC's ability to implement its plans to restructure the 
control of transmission facilities in the United States.\8\ As a result 
of FERC's plans, many utilities will cede operating control--and in 
some cases, actual ownership--of their transmission facilities to newly 
created entities. The status of these entities as well as the status of 
utility systems that own stakes in them raise a number of issues under 
the Act.
---------------------------------------------------------------------------
    \8\ See FERC Order 2000, ``Regional Transmission Organizations,'' 
65 FR 810 (Jan. 6, 2000) (codified at 18 C.F.R. Sec. 35.34).
---------------------------------------------------------------------------
    While the SEC believes it has the necessary authority under the Act 
to deal with the issues created by the FERC's restructuring without 
impeding that restructuring, repeal of the Act would resolve the 
issues. In the absence of repeal, however, there are potential 
amendments to the Act that would permit the SEC more efficiently to 
deal with regulatory conflicts and other issues of this type. In both 
the Report and in prior testimony, the SEC has suggested that if 
Congress chooses not to repeal the Act, it could grant the agency broad 
exemptive authority similar to that we currently have under the other 
Acts that we administer.\9\ Although an expansion of the SEC's 
exemptive authority under the Act would not achieve the economic 
benefits of simplifying the Federal regulatory structure and would 
continue to enmesh the SEC in difficult issues of energy policy, it 
would provide the SEC with a greater ability to respond quickly and 
appropriately to changes in the industry and the regulatory 
environment.
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    \9\ The SEC's current exemptive authority under the 1935 Act is 
considerably narrower than the exemptive authority under other 
securities laws. A model of broader exemptive authority is contained in 
section 6(c) of the Investment Company Act of 1940, 15 U.S.C. Sec. 80a-
6(c), which grants the SEC the authority by rule or order to exempt any 
person or transaction from any provision or rule if the exemption is 
necessary or appropriate in the public interest and consistent with the 
protection of investors. See also section 206A of the Investment 
Adviser's Act of 1940, 15 U.S.C. Sec. 80b-6a and section 36 of the 
Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78mm. Section 28 of 
the Securities Act of 1933, 15 U.S.C. Sec. 77z-3, grants the Commission 
similar exemptive authority, but permits it to exercise it only 
pursuant to a rulemaking.
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    The SEC takes seriously its duties to administer faithfully the 
letter and spirit of the 1935 Act, and is committed to promoting the 
fairness, liquidity, and efficiency of the U.S. securities markets. By 
supporting conditional repeal of the 1935 Act, the SEC hopes to reduce 
unnecessary regulatory burdens on America's energy industry while 
providing adequate protections for energy consumers.

                               ----------

               PREPARED STATEMENT OF CYNTHIA A. MARLETTE

                         Deputy General Counsel
                  Federal Energy Regulatory Commission

                             March 29, 2001

    Senator Enzi and Members of the Subcommittee: Good morning. My name 
is Cynthia A. Marlette, and I am Deputy General Counsel of the Federal 
Energy Regulatory Commission (FERC). Thank you for the opportunity to 
appear here today to discuss the Public Utility Holding Company Act of 
1935 (PUHCA) and S. 206, which would repeal the 1935 Act and replace it 
with a streamlined Act. I appear today as a Commission staff witness, 
and do not speak on behalf of the Commission or any Commissioner.
    As I will discuss further in my testimony, S. 206 provides an 
important piece of the legislative reform that is needed to support the 
Nation's emerging competitive electric energy markets. At this critical 
stage in the evolution of the electric industry, it is important to 
take all reasonable measures to support the development of competitive 
energy markets and to provide appropriate incentives for electric and 
natural gas infrastructure to meet our Nation's energy needs. Such 
measures must ensure adequate protection of electric and natural gas 
ratepayers from abuse of market power and inappropriate cross-
subsidization. Repeal or reform of PUHCA, such as that contained in S. 
206, will help accomplish these objectives, whether as part of a 
comprehensive energy legislative package or on a stand-alone basis.
    This is a time of enormous change for the electric utility 
industry. We are at a critical juncture in the development of 
competitive power markets, and it is appropriate for the Congress to 
reexamine the framework for regulating electric utilities, including 
unnecessary restrictions that PUHCA places on the activities of certain 
participants in these power markets. While one of the goals of PUHCA 
was to protect against corporate structures that could harm investors 
and ratepayers, today some of PUHCA's restrictions may actually impede 
competitive markets and appropriate competitive market structures, to 
the detriment of ratepayers and shareholders in the long run.
    Since the Banking Committee's hearings on an earlier version of 
PUHCA repeal legislation were held in 1996, the FERC and many State 
regulators and State legislatures have continued regulatory actions to 
support and encourage the development of competitive power markets at 
both the wholesale and retail levels. Many areas of the country, such 
as Pennsylvania, have been very successful. However, there have been 
some bumps in the road. In particular, California's experience with 
only a partially deregulated electric generation market and a severe 
lack of adequate generation supply and transmission infrastructure in 
that State have grabbed media attention nationwide. This has caused 
some regulators and industry observers to become wary of the promised 
virtues of competition in the electric industry. There is no doubt that 
California and the West face serious, complex electric power supply and 
pricing issues. Nevertheless, while regulators and industry 
participants may disagree on near-term remedies to address the 
dysfunctions in California and Western power markets, the majority of 
industry observers continue to believe that competitive power markets, 
as opposed to traditional cost-based regulation, will best serve 
consumers in the long run.
    In past testimony, FERC witnesses have raised no objection to 
repeal or reform of PUHCA, so long as certain ratepayer issues are 
addressed. Today, we continue to take the position that PUHCA needs to 
be repealed or reformed, so long as the following matters are 
addressed:

 First, Congress should ensure that the FERC and State 
    regulatory authorities have adequate access to the books and 
    records of all members of all public utility holding company 
    systems when that information is relevant to their statutory 
    ratemaking responsibilities. This is necessary to prevent affiliate 
    abuse and subsidization by electricity ratepayers of nonregulated 
    activities of holding companies and their affiliates.
 Second, any exemptions from a new holding company act should 
    be crafted narrowly. While it may be appropriate to grandfather 
    previously authorized activities or transactions, no holding 
    company should be exempt from affiliate abuse oversight.
 Third, if Congress transfers any existing PUHCA functions to 
    the FERC, instead of repealing PUHCA in its entirety, Congress 
    needs to provide FERC with staff and administrative support 
    necessary for us to carry out the additional responsibilities.

    S. 206, as it was introduced on January 30, 2001, adequately 
addresses the above concerns.
Background
    Under current law, the two major Federal statutes affecting 
electric utilities are PUHCA and the Federal Power Act (FPA). Both 
statutes were enacted as part of the same legislation in 1935 to curb 
widespread financial abuses that harmed electric utility investors and 
electricity consumers. While there is overlap in the matters addressed 
by these Acts, they each have different public interest objectives. The 
areas of overlap in the two statutes, and specific issues raised if 
PUHCA is repealed or amended, are described in detail in the Attachment 
to my testimony. As a general matter, however, the Securities and 
Exchange Commission (SEC) regulates registered public utility holding 
companies under PUHCA while FERC, under the FPA, regulates the 
operating electric utility and gas pipeline subsidiaries of the 
registered holding companies. The agencies often have responsibility to 
evaluate the same general matters, but from the perspective of 
different members of the holding company system and for different 
purposes. The FERC focuses primarily on a transaction's effect on 
utility ratepayers. The SEC focuses primarily on a transaction's effect 
on corporate structure and investors.
    In June 1995, the SEC issued a report entitled ``The Regulation of 
Public-Utility Holding Companies'' and recommended that Congress 
conditionally repeal PUHCA and enact certain ratepayer safeguards in 
its place. We agree with a fundamental premise of the SEC's report that 
rate regulation at the Federal and State levels has become the primary 
means of ensuring ratepayer protection against potential abuse of 
monopoly power by utilities that are part of holding company systems.
    Further, we believe that PUHCA, in its current form, may actually 
encourage market structures that impede competition. In particular, 
under PUHCA acquisitions by registered holding companies generally must 
tend toward the development of an ``integrated public-utility system.'' 
To meet this requirement, the holding company's system must be 
``physically interconnected or capable of physical interconnection'' 
and ``confined in its operations to a single area or region.'' This 
requirement tends to result in geographic concentrations of generation 
ownership, which may enhance market power and diminish competition.
    In addition, PUHCA may cause unnecessary regulatory burdens to 
utilities who, in compliance with Commission policy and regulations, 
seek to form or join regional transmission organizations (RTO's). It is 
RTO's that will provide the major structural reform needed in the 
electric industry to ensure mitigation of market power and an 
efficient, reliable transmission system. These institutions will 
operate, or both own and operate, the interstate transmission grid 
within their regions, provide transmission services on an open, 
nondiscriminatory basis, and provide the means for regional 
transmission planning. They may be nonprofit independent system 
operators (ISO's), or they may be for-profit transmission companies 
(transcos), or a combination of the two. The cornerstone requirement 
for the institutions, however, is that they be independent from power 
market participants, i.e., independent from those that own, sell or broker 
generation. Under PUHCA, any entity that owns or controls facilities used 
for the transmission of electric energy--such as an RTO--falls within the 
definition of public utility company, and any owner of 10 percent or more 
of such a company would be a holding company and potentially 
could be required to become a registered holding company. This could 
serve as a significant disincentive for investments in independent 
for-profit transcos that qualify as RTO's.

Review of S. 206
    S. 206 would repeal PUHCA and, in its place, enact the Public 
Utility Holding Company Act of 2001. The new Act would do five major 
things:

 provide the FERC with access to books and records of holding 
    companies and their associate and subsidiary companies, and of any 
    affiliates of holding companies or their subsidiaries (section 5);
 give State commissions that have jurisdiction over a public 
    utility in a public utility holding company system access to books 
    and records of a holding company, its associates or affiliates 
    (section 6);
 require the FERC to promulgate a final rule, no later than 90 
    days after enactment, to exempt from the books and records access 
    requirements of section 5 any person that is a holding company 
    solely with respect to one or more: qualifying facilities under the 
    Public Utility Regulatory Policies Act of 1978; exempt wholesale 
    generators; or foreign utility companies (section 7);
 provide that nothing in the Act precludes the FERC or a State 
    commission from exercising its jurisdiction under otherwise 
    applicable law to determine whether a public utility may recover in 
    rates any costs of an activity performed by an associate company, 
    or any costs of goods or services acquired from an associate 
    company (section 8); and
 grandfather activities in which a person is legally engaged or 
    authorized to engage on the effective date of the new act (section 
    9).

With these protections in place, and with the Commission's other 
regulatory authorities under the FPA in place, we believe that S. 206 
is an appropriate vehicle for repealing PUHCA without impairing 
ratepayer protection.
    If PUHCA is not repealed, Congress should address the Ohio Power 
regulatory gap created by a 1992 court decision. In a decision by the 
United States Court of Appeals for the District of Columbia Circuit, 
Ohio Power Company v. United States, 954 F.2d 779 (D.C. Cir. 1992), the 
court held that if a public utility subsidiary of a registered holding 
company enters into a service, sales or construction contract with an 
affiliate company, the costs incurred under that affiliate contract 
cannot be reviewed by FERC. The court reasoned that because the SEC has 
to approve the contract before it is entered into, FERC cannot examine 
the reasonableness or prudence of the costs incurred under that 
contract. FERC must allow the costs to be recovered in wholesale 
electric rates, even if the utility could have obtained comparable 
goods or services at a lower price from a nonaffiliate.
    The Ohio Power decision has left a gap in rate regulation of 
electric utilities. The result is that utility customers served by 
registered holding companies have less rate protection than customers 
served by nonregistered systems. If PUHCA is repealed, as in S. 206, 
this issue becomes moot. If the contract approval provisions of PUHCA 
are retained, however, this regulatory gap should be closed to restore 
FERC's ability to regulate the rates of utilities that are members of 
registered holding company systems.
    In summary, S. 206 provides an appropriate means to help promote 
emerging competitive electric power markets while at the same time 
providing the FERC and States additional access to books and records in 
order to protect consumers against inappropriate cross-subsidization 
and market power abuse. Thank you again for the opportunity to be here 
today, and I would be happy to answer any questions you may have.

             ATTACHMENT TO STATEMENT OF CYNTHIA A. MARLETTE

Existing Statutory Framework: FERC/SEC Jurisdiction
    The FERC's primary function under the FPA is ratepayer protection. 
The FERC regulates public utilities as defined in the FPA. These 
include individuals and corporations that own or operate facilities 
used for wholesale sales of electric energy in interstate commerce, or 
for transmission of electric energy in interstate commerce. The FERC 
does not regulate all utilities. Publicly owned utilities and most 
cooperatives are exempt from our traditional rate regulatory authority.
    The FERC ensures that rates, terms and conditions for wholesale 
sales of electric energy and transmission are just, reasonable and not 
unduly discriminatory or preferential. In addition, the FERC has 
responsibilities over corporate mergers and other acquisitions and 
dispositions of jurisdictional facilities, transmission access, certain 
issuances of securities, interlocking directorates, and accounting. In 
exercising its responsibilities, the Commission must take into account 
any anticompetitive effects of jurisdictional activities.
    There is overlap in the jurisdiction of the FERC and the SEC. As a 
general matter, the SEC regulates registered utility holding companies 
whereas the FERC regulates the operating electric utility and gas 
pipeline subsidiaries of the registered holding companies. The agencies 
often have responsibility to evaluate the same general matter, but from 
the perspective of different members of the holding company system and 
for different purposes. The FERC primarily focuses on the impact of a 
transaction on utility ratepayers. The SEC, on the other hand, 
primarily focuses on the impact of a transaction on corporate structure 
and investors.
    There are four major areas of overlap in the jurisdiction of the 
FERC and the SEC with respect to regulation of the electric industry:

          (1) Accounting--The SEC has authority to establish accounting 
        requirements for every registered holding company, and every 
        affiliate and subsidiary of a registered holding company. Many 
        of these companies are public utilities that are also under the 
        FERC's jurisdiction and subject to its accounting requirements.
          (2) Corporate regulation--The SEC must approve the 
        acquisition of a public utility's securities by a registered 
        holding company. The FERC must approve the disposition or 
        acquisition of jurisdictional facilities by a public utility.
          (3) Rates--The SEC must approve service, sales and 
        construction contracts among members of a registered holding 
        company system. The FERC must approve wholesale rates 
        reflecting the reasonable costs incurred by a public utility 
        under such contracts.
          (4) PUHCA Exemptions--Under the PUHCA section 32 amendment 
        contained in the Energy Policy Act of 1992, the FERC must 
        determine whether an applicant meets the definition of exempt 
        wholesale generator, and thus is exempt from the Holding 
        Company Act. With minor exceptions, the SEC continues to make 
        PUHCA exemption determinations under the pre-Energy Policy Act 
        PUHCA provisions as well as under the new section 33 of PUHCA 
        (concerning foreign companies).

    Congress recognized the overlap in FERC-SEC jurisdiction when it 
simultaneously enacted PUHCA and the FPA in 1935. It included section 
318 in the FPA, which provides that if any person is subject to both a 
requirement of the FPA and PUHCA with respect to certain subject 
matters, only the requirement of PUHCA will apply to such person, 
unless the SEC has exempted such person from the requirements of PUHCA. 
If the SEC has exempted the person from the PUHCA requirement, then the 
FPA will apply.
    During the half-century following enactment of PUHCA and the FPA, 
there were no significant problems resulting from the overlap in FERC-
SEC jurisdiction, until a series of court decisions involving the 
wholesale rates of the Ohio Power Company. Under the last of these 
court decisions, a 1992 decision by the United States Court of Appeals 
for the District of Columbia Circuit (Ohio Power Company v. FERC, 954 
F.2d 779 (D.C. Cir. 1992) (Ohio Power)), the FERC does not have the 
extent of rate jurisdiction which it previously thought it had over 
public utility subsidiaries of registered electric utility holding 
companies.
    Under the 1992 Ohio Power decision, if a public utility subsidiary 
of a registered holding company enters into a service, sales or 
construction contract with an affiliate company, the costs incurred 
under that affiliate contract cannot be reviewed by the FERC. The SEC 
has to approve the contract before it is entered into. However, the 
FERC cannot examine the reasonableness or prudence of the costs 
incurred under that contract. The FERC must allow those costs to be 
recovered in wholesale electric rates, even if the utility could have 
obtained comparable goods or services at a lower price from a 
nonaffiliate.
    This decision has left a major gap in rate regulation of electric 
utilities. The result is that utility customers served by registered 
holding companies have less rate protection than customers served by 
nonregistered systems. If PUHCA is repealed, the Ohio Power problem 
goes away. This is a significant advantage of S. 206, introduced 
January 30, 2001. S. 206 would repeal PUHCA and enact a new, more 
limited law that does not give rise to an Ohio Power problem. Short of 
repeal of PUHCA, however, the existing regulatory gap needs to be 
addressed.
Issues Raised If PUHCA Is Repealed or Amended
    There are several ratepayer protection issues on which Congress 
should focus in considering PUHCA legislation. S. 206 adequately 
addresses these issues.
    An important aspect of ratepayer protection is preventing affiliate 
abuse and the subsidization by ratepayers of the nonregulated 
activities of nonutility affiliates. These issues can arise in 
virtually every area of the FERC's responsibilities. In the case of 
public utilities that are members of holding companies, there are 
increased opportunities for abuses. There are several reasons for this.
    First, registered holding companies have centralized service 
companies that provide a variety of services (e.g., accounting, legal, 
administrative and manage-
ment services) to both the regulated public utility operating companies 
in the holding company system, and to the nonregulated companies in the 
holding company system. The FERC's concern in protecting ratepayers is 
that when the costs of these service companies are allocated among all 
members of the holding company system, the ratepayers of the public 
utility members bear their fair share of the costs and no more; 
ratepayers should not subsidize the nonregulated affiliates of the 
public utilities.
    Thus far, FERC has had few, if any, problems with inappropriate 
allocations of service company costs. The services provided by the 
centralized service companies have been relatively limited. In recent 
years, however, there has been a substantial increase in the services 
being performed by these types of service company affiliates. In many 
registered company systems, the majority of the costs of operating and 
maintaining the operating utilities' systems, which previously were 
incurred directly by each individual utility, are now being incurred by 
the service company and billed to the public utility under SEC-approved 
allocation methods. These costs can be significant for ratepayers. This 
means that rate regulatory oversight of service company allocations is 
imperative.
    A second concern involves special purposes subsidiaries. In 
addition to the centralized service companies, registered holding 
companies increasingly are forming special purpose subsidiaries that 
contract with their public utility affiliates to supply services, as 
well as goods and construction. This can include fuel procurement, 
services such as operation of power plants, telecommunications, and 
construction of transmission lines and generating plants.
    The FERC's primary concern with affiliate contracts for goods and 
services is that utilities not be allowed to flow through to electric 
ratepayers the costs incurred under affiliate contracts if those costs 
are more than the utility would have incurred had it obtained goods or 
services from a nonaffiliate. As discussed earlier, under the 1935 
PUHCA the FERC cannot provide adequate protection to ratepayers served 
by registered systems because of the 1992 Ohio Power court decision.
    The Commission recently has made some progress in protecting 
customers served by registered holding companies by using its 
conditioning authority over registered holding company public utilities 
that seek approval to sell power at market-based rates. The Commission 
has said that if such utilities want to sell at market-based rates, 
they must agree not to purchase nonpower goods and services from an 
affiliate at an above-market price; they must agree that if they sell 
nonpower goods and services to an affiliate, they will do so at the 
higher of their cost or a market price. However, the Commission's 
market rate conditioning authority is not enough to protect all 
registered system ratepayers against abusive affiliate contracts. Short 
of repeal of PUHCA, legislation is needed to fully remedy the 
regulatory gap.
    According to the SEC's 1995 report, service companies render over 
100 different types of services to the operating utilities on their 
systems, with nonfuel transactions aggregating approximately $4 billion 
annually. This growth adds to the potential for ratepayer subsidies 
involving both the centralized and the special-purpose service 
companies.
    Another reason for heightened concern regarding affiliate abuses in 
all holding company systems, both registered and exempt, is the large 
number of holding company subsidiaries that engage in nonutility 
businesses. According to the SEC report, since the early 1980's the 
number of nonutility subsidiaries of registered companies has 
quadrupled to over 200. The trend in exempt companies is also likely to 
be significant as well. The sheer number of nonutility business 
activities brings greater potential for improper allocation of 
centralized service company costs to the nonutility businesses (i.e., 
electric ratepayers subsidizing the nonutilities' fair share of the 
costs). It also increases the opportunities for affiliate contracting 
abuses.
    To protect against affiliate abuse and cross-subsidization, Federal 
and State regulators must have access to the books, records and 
accounts of public utilities and their affiliates. Under section 301 of 
the FPA (and section 8 of the Natural Gas Act), the FERC has 
substantial authority to obtain such access. It can obtain the books 
and records of any person who controls a public utility, and of any 
other company controlled by such person, insofar as they relate to 
transactions with or the business of the public utility. This, however, 
may not necessarily reach every member of the holding company. Thus 
far, there has been no significant problem in obtaining access to books 
and records and in monitoring and protecting against potential abuses. 
However, the SEC's regulatory role with respect to registered systems 
has been an added safeguard.
    It is critical that both State and Federal regulators have access 
to books and records of all companies in a holding company system that 
are relevant to costs incurred by an affiliated utility. This is 
equally true with respect to both registered and exempted holding 
company systems. If Congress modifies or repeals PUHCA, it should 
clearly confirm the FERC's mandate and authority to ensure that 
ratepayers are protected from affiliate abuse. Similarly, we encourage 
Congress to be mindful of concerns expressed by State commissions and 
provide States with appropriate access to relevant books and records of 
all holding company systems.
    In addition to the above ratepayer protection concerns, there are 
several other matters that should be considered in analyzing PUHCA 
reform. These include future corporate structures in the electric 
industry, diversification activities, and the issuances of securities 
affecting public utilities.
    As mentioned earlier, the FERC must approve public utility mergers, 
acquisitions, and dispositions of jurisdictional facilities. This is an 
area in which the Commission has overlapping jurisdiction with the SEC, 
but also an area in which in some instances there is no overlap. 
Jurisdictional facilities under the FPA are facilities used for 
transmission in interstate commerce, or for sales for resale in 
interstate commerce. FERC has claimed jurisdiction over transfers of 
jurisdictional sales contracts but has disclaimed jurisdiction over 
dispositions that solely involve physical generation facilities. It 
appears that State regulators have adequate authority to regulate 
dispositions of physical generation assets. Further, such dispositions 
or acquisitions would be subject to the antitrust laws.
    The FERC does not have jurisdiction to approve or disapprove 
diversification activities of public utilities or holding companies. 
Thus, if PUHCA were repealed, there would be no Federal oversight of 
diversification activities of registered holding companies or their 
public utility members, other than through FERC auditing of books and 
records. The SEC does not directly review public utility 
diversification activities of other holding companies and public 
utilities, and this has not posed any significant problems in the 
FERC's protection of ratepayers. In addition, many State commissions 
regulate diversification by public utilities that sell at retail.
    A final area involves issuances of securities. The FERC must 
approve issuances of securities by public utilities that are not 
members of registered holding company systems, unless their security 
issuances are regulated by a State commission. Because the majority of 
States regulate issuances by public utilities, the FERC does not 
regulate most public utilities' issuances. If PUHCA were repealed, it 
appears that there would be no Federal review and approval of issuances 
of securities by holding companies or their public utility members. The 
SEC can more appropriately address whether any Federal oversight is 
necessary in this area.

                               ----------

                 PREPARED STATEMENT OF DAVID M. SPARBY

           Vice President, Government and Regulatory Affairs
                           Xcel Energy, Inc.

                             March 29, 2001

Introduction
    Senator Enzi, Members of the Subcommittee, my name is Dave Sparby, 
and I am the Vice President, of Government and Regulatory Affairs of 
Xcel Energy, Inc. Xcel Energy is a holding company registered under the 
Public Utility Holding Company Act of 1935 (``PUHCA''). Xcel Energy was 
created as the result of a merger between Minneapolis-based Northern 
States Power (NSP) and Denver-based New Century Energies (NCE). The 
merger of those two companies was completed on August 17 of last year, 
some 17 months after it was announced. Xcel Energy serves more than 3 
million electricity and 1.5 million natural gas customers in 12 States, 
and 2 million electricity customers internationally.
    While I am speaking here today on behalf of Xcel Energy, I would 
note that we are also members of the Repeal PUHCA Now! Coalition, an ad 
hoc group of electric and gas utility systems, with public utility 
operations (collectively, the ``Coalition'').\1\ We at Xcel, and the 
other members of the Coalition, would like to thank you very much for 
inviting us to submit testimony in favor of legislation repealing 
PUHCA.
---------------------------------------------------------------------------
    \1\ A complete list of the companies forming the Coalition is set 
forth in Attachment 1.
---------------------------------------------------------------------------
    As Senator Enzi and other Members of the Subcommittee know, issues 
surrounding the relevance and efficacy of PUHCA, originally enacted in 
1935, have been before the Congress almost continuously over the past 
20 years. And while the statue has been amended in piecemeal fashion to 
respond to the changing dynamics of the energy industry, true reform 
has remained elusive. The legislation now before the Subcommittee, S. 
206, offers the promise of such true reform and we support its speedy 
enactment. Indeed, legislation like S. 206 has been reported by the 
full Banking Committee, in identical or virtually identical form in 
each of the last two Congresses.

The Case for PUHCA Repeal
    To be clear, we believe the case for enactment of S. 206 is strong. 
As articulated more eloquently in previous reports of the Subcommittee 
and elsewhere:

 The purposes underlying the original requirements and 
    regulations under PUHCA no longer exist and other regulatory 
    programs at the State and Federal level have arisen to address 
    remaining concerns;
 PUHCA's restrictions and requirements deter and inhibit the 
    otherwise orderly flow of capital into emerging competitive 
    markets; and
 PUHCA requirements might well work at cross purposes with 
    other important national energy initiatives.

The Need for PUHCA Regulation Has Passed
    To provide some historical perspective, it must be remembered that 
when PUHCA was enacted nearly 67 years ago, it was designed primarily 
to eliminate the unsound financial structures that had been created by 
gas and electric holding companies during the 1920's. Abuses discovered 
at the time included the marketing of holding company securities based 
on unsound and fictitious values and without adequate disclosure to 
investors, and a practice by some companies of requiring their 
operating utility subsidiaries to pay excessive dividends or purchase 
services at excessive prices under non-arms-length service contracts.
    Congress entrusted the administration of this statute to the new 
Securities and Exchange Commission (``SEC'') because the SEC was the 
agency with the greatest expertise in financial matters and was already 
charged with the responsibility for overseeing investor protection 
under the Securities Act of 1933 and the Securities and Exchange Act of 
1934. PUHCA is unique, however, in that it is the only securities 
statute designed to regulate a single non-financial industry.
    The task of overseeing the financial restructuring of the electric 
and gas utility holding companies was largely completed by the mid-
1950's. And, as the SEC's role in administering other Federal 
securities laws has evolved, it has become clear that PUHCA no longer 
serves any independent purpose in assuring investor protection. PUHCA 
is intended, after all, to regulate ``the corporate structure and 
financing of public-utility holding companies and other affiliates.'' 
There is no question but that this authority is redundant of that which 
the SEC already has under the Securities Act of 1933 and Securities and 
Exchange Act of 1934. And in part for that reason, since 1982, the SEC 
has been on record favoring repeal of PUHCA.
    Some have argued, however, that repeal of PUHCA would create a new 
``gap'' in effective State/Federal regulation of utilities to the 
detriment of utility customers. But in this regard, it is important to 
remember what PUHCA does, and what it does not do. PUHCA does not, and 
was never intended to, address rate regulatory issues. Local 
distribution matters are exclusively within the province of State 
regulators, while the setting of wholesale rates and other transactions 
by utilities relating to the transmission of electricity or of natural 
gas in interstate commerce are regulated by the FERC. Repeal of PUHCA 
as proposed in the bill before you would not alter this allocation of 
jurisdiction and authority and indeed, the record keeping and report 
requirements of the legislation will facilitate the on-going work of 
FERC and State agencies to protect ratepayer interests.
    Moreover, the ``gap'' in effective State regulation of electric and 
gas utilities that Congress found in 1935 no longer exists. Simply put, 
electric and gas utilities are among the most highly regulated 
businesses there are, and there is no longer any basis for believing 
that the States and the Federal Energy Regulatory Commission (``FERC'') 
are unable to protect utility consumers.

The Effect of PUHCA on Necessary Investment
    If PUHCA were merely an arcane law directed at problems that no 
longer exist, or simply duplicated other Federal and State regulatory 
laws, perhaps the case for PUHCA repeal would not be quite so 
compelling. But because of the structural inflexibility that is built 
into PUHCA, the statute has long been an obstacle to the implementation 
of significant competitive, economic and regulatory changes occurring 
in this country and throughout the world. PUHCA prevents registered 
holding companies from participating equally with all other energy 
companies in various activities that Congress and other Federal 
agencies are promoting, and, in addition, deters new investment in 
certain energy businesses by non-traditional investors by subjecting 
them to possible SEC regulation as statutory ``holding companies.''
    In the past, Congress has addressed the ``PUHCA Problem'' in a 
piecemeal fashion. For example, Congress passed legislation in 1978 and 
again in the mid-1980's designed to promote the development of and 
investment in cogeneration and small power production facilities in the 
United States. Further amendments in 1990 were designed to allow the 
registered gas utility holding companies to participate fully in 
natural gas supply ventures. In 1992, the Energy Policy Act had 
somewhat lowered the PUHCA barrier to the development of an 
independent, competitive, wholesale generation market, and in 1996, 
Congress authorized registered holding companies, like all other 
companies, to invest in new telecommunications businesses.
    Nonetheless, the ``integration'' standards under PUHCA remain an 
obstacle to economically desirable utility mergers. The FERC's review 
of electric utility mergers focuses on assuring that they are pro-
competitive, that is, that a merger does not lead to a situation in 
which the resulting company has too much control over generation assets 
in a single geographic market. Under the FERC's merger guidelines, 
therefore, it is much easier to form a union between utilities that 
operate in different markets than between utilities that operate next 
door to each other. And yet the PUHCA integration standard stands in 
the way of geographically diverse utility systems by limiting a 
registered holding company to a single ``integrated'' electric system 
that's confined to a single area or region.
    PUHCA also prevents registered holding companies from engaging in 
many desirable nonutility businesses, or, at a minimum, requires 
lengthy filings with the SEC and onerous ongoing reporting obligations 
that unregulated competitors in these businesses are not subjected to. 
This intrusion into the business judgment of holding company management 
is unprecedented under Federal law and positively harms the interest of 
investors by imposing costs in the form of lost business opportunities 
and regulatory compliance costs.
    Under PUHCA, a company organized to construct and own new 
generation [except ``exempt wholesale generators'' (called an ``EWG'')] 
or transmission facilities would be an ``electric utility company,'' 
and any 10 percent owner of its stock would be a ``holding company.'' 
Every holding company must register under PUHCA, absent an available 
exemption. Registration would subject an investor to onerous financial 
and business regulation by the SEC. In addition, in many cases, an 
investor who acquires 5 percent or more of the stock of an electric 
utility company would require SEC approval, which necessitates a 
lengthy review process. Therefore, out-of-State utilities, as well as 
other types of nontraditional investors (e.g., equipment suppliers, 
diversified energy companies, and financial investors) are effectively 
deterred from making innovative investments in new generation or 
transmission assets. The EWG exemption does not apply to an entity 
(called a ``Transco'') that is originated to build a new transmission 
line to transport new generation capacity.
    Existing utilities and holding companies would find it difficult to 
obtain SEC approval under PUHCA to acquire 5 percent or more of the 
stock of a new generation or transmission company. This is because the 
``integration'' standards under PUHCA prohibit investments in utilities 
in more than one State unless the facilities in each State are 
physically interconnected with each other.
    A nontraditional investor (e.g., an equipment manufacturer, a 
diversified energy concern, or a financial investor) may not qualify 
for any exemption under PUHCA if it became a ``holding company'' over a 
new generation or transmission company. Thus, PUHCA hinders 
nonutilities from making investments in new generation or transmission 
assets.
    The only practical option for investing in new generation in 
California, for example, is through an ``exempt wholesale generator,'' 
or an ``EWG'' for short. An EWG is exempt from all provisions of PUHCA 
and the owners of an EWG are not treated as ``holding companies.'' But 
holding companies that are already registered under PUHCA, which now 
account for more than 40 percent of the entire electric utility 
industry, are limited by SEC regulations in the amount of investments 
that they may make in EWG's. This investment restriction has impacted 
the wholesale market in two ways:

 First, many registered holding companies have already reached 
    their investment limit on other EWG projects and thus cannot enter 
    new markets. Thus, even if these utilities wanted to enter the 
    troubled California generation market, the PUHCA investment limit 
    would prohibit them from doing so or, at a minimum, necessitate a 
    lengthy and uncertain application review process at the SEC in 
    order to obtain increased investment authority.
    Indeed, we believe that this restriction is one of the many factors 
    that might well have contributed to the current California energy 
    crisis and will stand in the way of any permanent solution is the 
    structural and financial restraints imposed under PUHCA. Because 
    PUHCA unnecessarily restricts the flow of capital it has a negative 
    impact on places such as California that are in tremendous need of 
    additional generation resources.
    I might add that the same can be said for other areas of the West 
    as well. Xcel Energy is currently facing a tremendous problem in 
    Cheyenne, Wyoming. The citizens of that part of Wyoming are served 
    by Cheyenne Light, Fuel and Power Company (Cheyenne), a wholly 
    owned subsidiary of Xcel. Cheyenne, which owns no generation assets 
    of its own, has been serving local citizens through its purchase of 
    wholesale power from another utility as a full requirements 
    customer since 1963. This past year that provider indicated that it 
    would very significantly increase wholesale prices for future sales 
    to Cheyenne. To the extent that PUCHA's capital inhibiting affects 
    limited generation investment, this result as well as a number of 
    other factors, have led to significant increases in the short-term 
    costs to serve our customers.
 Second, the EWG exemption applies only to entities that 
    generate electricity ``exclusively'' for sale at wholesale. Thus, 
    the EWG exemption provides no relief for new investment in 
    generation assets where the output will be sold at retail, even 
    though such retail sales are permitted--and even encouraged--by 
    State utility restructuring laws.

    Passage of the bill before you will eliminate the artificial 
structural and financial barriers that now inhibit the flow of capital 
and would thus contribute to the resolution of California and broader 
Western regional energy problems. To be clear, we are not here claiming 
that PUHCA repeal, by itself, will solve the problems in Western 
markets, just as it is by no means the sole cause of those problems, 
but elimination of its outdated restrictions will certainly facilitate 
the development of new generation and transmission capacity in the 
West. All steps that can be taken to enhance investment in generation 
and transmission capacity should be made during this energy shortfall. 
Free flow capital is not merely a theoretical problem. Customers 
throughout the Western Region have been hurt by the lack of development 
of generation and transmission.
    In short, with its mandate of a vertically integrated utility 
system confined to a single area or region, PUHCA is clearly a barrier 
to increasing competition in the electric and gas utility industries. 
It inhibits efficiency gains, limits new competitors in the marketplace, 
leads to differing regulatory rules for competitors that are holding 
companies, and contributes to inefficient investment decisions by utility 
management and shareholders. These costs are real, substantial and 
should not be continued.

Potential PUHCA Conflicts With Other National Energy Objective
    The requirements of PUHCA are also posing a serious near-term 
obstacle to implementation of another national energy policy--the 
formation of regional transmission organizations (RTO's) pursuant to 
FERC Order No. 2000.
    We see more and more that a preferred model for RTO structures is 
the so-called Transco or Independent Transmission Company (ITC). The 
ITC's are independent for-profit companies to which many utilities seek 
to transfer both ownership and operating control of their transmission 
assets. ITC treats transmission like a business, and has the most 
incentive to move power--from whatever generating source. Their for-
profit status provides an efficient answer to reliably and 
competitively manage the system and--most importantly today--provide 
for its expansion. Yet, PUHCA would treat these new entities as 
``electric utility companies.'' Ownership of securities in ITC's would 
subject many now-exempt holding companies--and even utilities that are 
not holding companies of any kind--to burdensome PUHCA restrictions.
    Moreover, the registered electric utility holding companies (which 
now account for more than 40 percent of the entire electric utility 
industry) will need to seek routine approvals from the SEC in order to 
transfer their transmission assets to RTO's and to provide other 
financial support. Thus, we have one Federal agency (the FERC) that is 
seeking to restructure the ownership and/or control of the Nation's 
transmission grid, while another Federal agency (the SEC) stands in the 
way.
Conclusion
    PUHCA should be repealed at the earliest possible date. Therefore, 
Xcel Energy and the Coalition would support appropriate ``stand alone'' 
legislation or the inclusion of satisfactory legislative language 
repealing PUHCA in an acceptable ``comprehensive'' bill. And, we 
believe that PUHCA repeal should be clean, without lingering vestiges 
of this statue.
    As the SEC has noted for almost 20 years now, PUHCA is an archaic 
law that has long since served its original intended purposes. The 
abuses that gave rise to the passage of PUHCA no longer exist and are 
unlikely to recur, due to the existence of other regulatory laws. At 
the same time, PUHCA has presented and will continue to present an 
obstacle to the realization of other Federal and State energy 
initiatives that favor competition and new investment. In short, as a 
regulatory law, PUHCA almost always pushes in the wrong direction.
    Thank you again, Mr. Chairman, for the opportunity to submit this 
testimony to the Subcommittee.

                  PREPARED STATEMENT OF DAVID L. SOKOL

                            Chairman and CEO

                  MidAmerican Energy Holdings Company

                             March 29, 2001

    Senator Enzi and Members of the Committee, I am David Sokol, 
Chairman and CEO of MidAmerican Energy Holdings Company, a diversified, 
international energy company headquartered in Des Moines, IA. I am here 
today representing Mid-
American and other ``exempt'' utility holding companies that support S. 
206.
    Thank you very much for the opportunity to testify this morning on 
an issue of great importance to my company, and I believe, the American 
energy consumer. I would like to thank Senator Hagel for that very kind 
introduction and I am pleased to say that I am also a constituent of 
Senator Enzi's. I would like to commend Senator Enzi and the Members of 
the Subcommittee for calling this timely and important hearing.
    MidAmerican Energy Holdings Company consists of four major 
subsidiaries: CE Generation (CalEnergy), a global energy company that 
specializes in renewable energy development in California, New York, 
Utah, Texas, Arizona and Nevada, as well as the Philippines; 
MidAmerican Energy Company, an electric and gas utility serving the 
States of Iowa, South Dakota, Illinois and a small part of Nebraska; 
Northern Electric, a competitive electric and gas utility in the United 
Kingdom, and Home Services.com, a residential real estate company 
operating in, among other States, Maryland, Kentucky and Indiana. 
CalEnergy owns and operates geothermal power plants in the Imperial 
Valley of Southern California. The Company is the largest employer and 
taxpayer in Imperial County, one of the most economically disadvantaged 
counties in the State of California.
    I would like to focus my remarks on providing the committee with 
some real-world examples of how the Public Utility Holding Company Act 
(PUHCA) is limiting investment in energy infrastructure and reducing 
the supply options for American consumers at the very time when the 
industry needs new investment most.
    I have just returned from spending a week on the ground in 
California, observing first-hand the chaotic situation in that State. 
The causes of the California energy crisis are numerous and complex, 
but I believe they can be tied to two core problems--(1) lack of 
adequate investment and infrastructure in the energy sector and (2) 
regulatory policies that distort energy markets.
    Concerning investment and infrastructure, California enters this 
summer approximately 5,000 megawatts short of expected peak demand. 
Even with heroic efforts to reduce demand, it will be difficult for the 
State to avoid blackouts this summer. Critical shortcomings in electric 
transmission such as the well-examined bottleneck along ``Path 15'' 
reduce the ability of the system to move power efficiently.
    With regard to regulatory policies that distort energy markets, 
California took a number of steps which proved disastrous. In the name 
of reducing concerns about utility market power, the State either 
compelled or encouraged large-scale generation divestitures by the 
incumbent utilities and required those utilities purchase power in the 
volatile spot market. The State restructuring legislation also mandated 
significant rate reductions that discouraged new entrants from 
competing for retail customers. Combined with PUHCA's limitations on 
selling electricity generated by exempt wholesale generators (EWG's) at 
retail and the inadequacy of available transmission and generation, 
this helped smother retail competition at the residential level in its 
infancy. Also, almost all observers would agree with my view that the 
State's failure to preemptively address the excessive bureaucracy in 
its plant siting and environmental review procedures was a major 
shortcoming in California's restructuring plan.
    In its review of the energy situation in California and the West 
last year under Chairman Hoecker, FERC found, ``there is little doubt 
that the most crucial task ahead is to ensure that a robust supply 
enters this market, both now and in response to any future price 
signals.'' Nationwide, data from the North American Electric 
Reliability Council (NERC) project electric reserves of only 11.48 
percent in 2001, with electric demands increasing by more than 2 
percent per year. Typically, a 15 percent reserve is considered to be 
the minimum to ensure reliable service. Conservative estimates show 
that more than $76 billion will need to be invested in the sector by 
the end of the decade to assure reliable service.
    As this Congress considers the actions it can take to ease the 
energy crisis in California and the West, I believe you will see that 
PUHCA contributes to both of these problems. The law can and should be 
repealed, and only Congress can do so. To do otherwise would leave a 
Federal statute on the books that will continue to inhibit investment 
and distort markets in the West and throughout the country. The results 
of California's failure to address these issues in advance of the onset 
of full retail competition should be a warning to Congress about the 
need to move quickly on removing barriers to investment and market 
entry. On a more specific level, I would like to provide the 
Subcommittee with two concrete examples of how the Act prevents actions 
that could help alleviate the California electricity crisis.
    Last summer, we at MidAmerican began to see signs foreshadowing the 
severe problems that have afflicted the California electricity market. 
The investor-owned utilities in the State had already begun to suffer 
financially from the impacts of soaring wholesale electricity costs and 
capped retail rates. Since MidAmerican is a privately-held company 
whose largest shareholder is Berkshire Hathaway, we enjoy the benefit 
of substantial financial resources and the ability to take a long-term 
investment horizon. We gave serious consideration to a number of 
options that would have involved MidAmerican taking an equity position 
in the California utilities while working with the State to return the 
market to long-term viability.
    Every scenario we reviewed ran into the same roadblock--the Public 
Utility Holding Company Act. MidAmerican is exempt from the most 
intrusive regulatory restrictions of the Act because its regulated 
utility business is primarily in one State, Iowa. However, MidAmerican 
could not acquire more than 4.99 percent of the equity in any of the 
California utilities without running afoul of PUHCA on several fronts. 
It also is my understanding that a number of other utilities considered 
taking similar actions either individually or as part of a consortium, 
but ran into the same PUHCA roadblock.
    First, the physical integration requirements of PUHCA would have 
required MidAmerican to demonstrate that it could physically 
interconnect its utility systems in the Midwest with those of the 
California utilities. This is an impossible standard for MidAmerican to 
meet. Any other public utility, registered or exempt, operating within 
the eastern two-thirds of the United States would run into the same 
barrier.
    Second, even if we could have solved the problem of the physical 
integration requirement, MidAmerican would have been forced to become a 
registered holding company under the Act. This probably would have 
required the Company to separate itself from Berkshire Hathaway or have 
Berkshire divest itself of all nonenergy related assets. I am sure I do 
not have to explain to the Members of the Senate Banking Committee why 
neither of those options was even momentarily considered.
    In fact, the arrangement that allows Berkshire's interest in 
MidAmerican is probably the most extreme example of the so-called 
``PUHCA pretzel'' where holding companies are forced to contort 
themselves organizationally to avoid violating the law or registration 
under the Act. Berkshire Hathaway owns approximately 90 percent of the 
equity in MidAmerican, yet controls less than 10 percent of the voting 
interest in the company. Mr. Walter Scott, also of Omaha, holds the 
majority of the control of the Company at the Board level. Only by such 
structuring could Berkshire Hathaway make an investment in a regulated 
utility and avoid having to divest itself of its diversified holdings. 
This arrangement works because of the extraordinary level of trust and 
respect among the small number of owners of Mid-
American, but it should not be necessary. The Company is structured 
this way for one reason and one reason only--the arbitrary requirements 
of PUHCA.
    I hope you will take a moment to reflect on the absurdity of this. 
Berkshire Hathaway is one of the most financially stable private 
entities in the world, with a AAA bond rating. A Federal law enacted 
more than 65 years ago with the intent of protecting investors keeps 
MidAmerican and Berkshire out of California's utility market and almost 
prevented Berkshire from investing in MidAmerican. At the same time, 
the California utilities are unable to pay their dividends or even 
their bills, with cascading effects throughout the economy.
    Another example pertains to our interest in expanding the Company's 
Imperial Valley geothermal plants. These plants currently provide the 
California electricity market with approximately 300 megawatts of 
baseload, emissions-free, renewable electricity. We would like to 
double the size and output of these facilities, providing desperately 
needed electricity to the California market.
    In order to get this electricity to consumers in Southern 
California, additional transmission will need to be built. As you are 
well aware, the State's investor-owned utilities are in no financial 
condition to undertake this type of project. The obvious answer would 
be for CalEnergy to make the investment in the transmission lines 
necessary to connect these plants to electricity consumers. 
Unfortunately, PUHCA may stand in our way.
    Being an owner of a transmission facility in California creates 
similar PUHCA problems to investing in a California utility. Once 
again, the Company would be faced with maneuvering around the physical 
integration standard and dealing with Berkshire Hathaway's diversified 
portfolio. There may be some way around these problems, and we will 
explore every option to find a way to complete this expansion. 
Nonetheless, the existence of this unnecessary, outdated law makes it 
far more difficult to invest in this critical industry.
    One final item the Subcommittee should consider related to 
California is what will happen to the utility companies in the State 
once stability is returned to the marketplace. These companies face a 
long climb back to fiscal health, and will have a difficult time 
raising capital for new infrastructure. Yet, PUHCA will prevent most if 
not all domestic utilities, and discourage nonutility companies, from 
making equity investments in these companies for the reasons already 
discussed.
    Where will needed capital come from? I anticipate one of three 
sources. First nonutility companies could make these investments, but 
these companies will not have the benefit of prior experience in the 
industry and will be impeded by PUHCA just as Berkshire Hathaway. Federal 
or State governments are another possible source of capital. But, the 
political issues would seem to make that unlikely. The most likely 
scenario, I believe, is that foreign utility companies looking for a 
foothold in the U.S. market will take long looks at these companies.
    Since these companies are not restricted by the physical 
integration requirement on their ``first bite'' entry into the American 
market, they will enjoy a substantial advantage in the mergers and 
acquisitions market. I am not making a case against international 
investment. In fact, I strongly support it. But outdated, unnecessary 
laws should not hamstring American companies in this competition. Are 
there any good reasons not to repeal PUHCA? I do not believe so.
    (1) The SEC has consistently supported PUHCA repeal for almost 20 
years. Speaking on behalf of the SEC at a hearing of the House 
Subcommittee on Finance and Hazardous Materials, Commissioner Isaac C. 
Hunt, Jr. testified, ``by the early 1980's, the SEC had concluded that 
the 1935 Act had accomplished its basic purposes, and its remaining 
provisions, to a large extent, either duplicated State or Federal 
regulation or otherwise were no longer necessary to prevent the 
recurrence of the abuses that led to its enactment . . . Therefore, the 
SEC unanimously recommended that Congress repeal the statute.''
    Commissioner Hunt continued, ``In the summer of 1994, the SEC 
staff, at the direction of Chairman Arthur Levitt, undertook a study of 
regulation of public utility companies which culminated in a June 1995 
report. Based on the report, the SEC has recommended that Congress 
consider three legislative options for eliminating unnecessary burdens. 
The preferred option is repeal of the 1935 act, accompanied by the 
creation of additional authority to exercise jurisdiction over 
transactions among holding company affiliates. This course of action 
will achieve the economic benefits of unconditional repeal and also 
protect consumers.'' That is exactly the approach embodied in S. 206.
    (2) The bipartisan leadership of this Subcommittee also has 
consistently supported repeal. It is a tribute to the ability of this 
Subcommittee to work on a bipartisan basis toward good policy goals 
that both the Senator and Ranking Democrats on the Banking, Finance and 
Urban Affairs Committee are cosponsors of this bill. I believe it is 
also a testimony to the strength of the arguments for PUHCA repeal that 
senior Members of the Subcommittee who have heard both sides for years, 
join in support of PUHCA repeal.
    (3) Federal Energy Regulatory Commissioners have consistently 
supported repeal. On March 20, 1997 FERC Chair Elizabeth Moler, a 
Democratic appointee, testified, ``as presently structured, the Public 
Utility Holding Company Act inhibits competition. Congress should 
eliminate these impediments. Utilities need the freedom to pursue 
structural changes without facing antiquated rules that do not easily 
accommodate current policies favoring competition.'' At the same time, 
Independent Commissioner, Donald Santa, Jr. testified, ``this 
anachronistic Federal statute no longer serves any useful purpose and, 
in fact, is an impediment to greater competition in electricity 
markets.'' The current Chairman of FERC, Curt Hebert, is also a strong 
proponent of PUHCA repeal.
    PUHCA repeal will make it easier for FERC to continue policies to 
promote efficient, competitive wholesale markets. PUHCA is premised on 
geographically limiting utility companies while at the same time FERC 
is working to reduce market concentration.
    The limits PUHCA places on FERC's ability to promote competitive 
wholesale electricity markets are even more apparent today. PUHCA 
inhibits utilities' efforts to comply with FERC Order 2000 to establish 
independent regional transmission organizations (RTO's). Every 
nonutility participant in the electricity debate favors the 
establishment of RTO's to ensure the most efficient use of the electric 
transmission system and to guarantee that utilities do not use control 
of the transmission system to distort wholesale electricity markets. 
Every consumer group, every industrial user group, public power 
entities and rural coops all strongly support moving forward with 
RTO's.
    Many utilities, including MidAmerican Energy, are working to 
establish independent transmission companies, or ``transcos,'' that 
would provide for efficient management of transmission networks in large 
regional markets. As FERC strongly prefers that these organizations be 
large, multistate companies, they will be subject to PUHCA's restrictions. 
This discourages investment and delays the day we will see operational 
control of transmission fully separated from competitive market 
functions.
    (4) PUHCA repeal is pro-consumer. Repealing PUHCA will allow new 
investment, new ideas and new efficiencies in the electric and gas 
industries at a time when these are needed most. Last year, MidAmerican 
commissioned an independent study by the highly respected econometrics 
firm Analysis Group/Economics. Using the most conservative possible 
estimates, the study demonstrated directs costs to the economy of 
hundreds of millions of dollars annually from PUHCA. Other surveys that 
have attempted to quantify lost opportunity costs in the industry have 
estimated a multibillion dollar annual drag on the economy from PUHCA. 
I am pleased to provide our study to Members of the Committee for your 
review.
    Why then has PUHCA not been repealed yet?
    Because PUHCA repeal is a hostage to other aspects of the larger 
electricity debate. Other stakeholders in the industry have sought to 
use PUHCA as leverage to achieve their goals in energy policy. I do not 
say that in an accusatory sense. That is the way the game is often 
played, and MidAmerican has taken a leadership role in trying to 
resolve policy differences on the full range of these issues.
    Those efforts can and should continue, but I believe both Congress 
and the stakeholder community need to step forward and focus on what 
they support and are willing to help get passed. We need to end the 
politics of stalemate where interest groups have focused more on 
blocking progress on one another's priorities than on moving forward 
with good policy. Unfortunately, the losers in this hardplayed game 
have been America's energy consumers.
    Mr. Brunetti's company, Xcel Energy, is a registered holding 
company subject to the most stringent restrictions of PUHCA. In spite 
of the fact that our companies are regional competitors on the 
wholesale market, I support his company being removed from PUHCA's 
onerous restrictions. He supports my company being able to expand 
beyond its limited geographical scope and become a larger competitor in 
the Midwest and Great Plains. By removing both our companies from PUHCA 
constraints, you will enable each of us to compete more aggressively, 
operate more efficiently and serve consumers better.
    Last year, I joined Mr. Warren Buffett in discussing PUHCA repeal 
with House and Senate leaders. In those meetings, we warned that the 
energy sector was headed for a train wreck in either California or the 
Midwest. I don't take any pleasure in being right in that prediction, 
but I hope you will understand why I believe so strongly Congress must 
act now.
    The political game that has held PUHCA repeal hostage has been 
well-played on all sides, but the big loser has been the American 
consumer. It's time to change the way the game is played. I thank you 
for the opportunity to testify this morning and ask you to support S. 
206.

                               ----------

                PREPARED STATEMENT OF CHARLES A. ACQUARD

              Executive Director, National Association of
               State Utility Consumer Advocates (NASUCA)

                             March 29, 2001

Introduction
    Good morning Senator Enzi and Members of the Subcommittee. I am 
Charlie Acquard, Executive Director of the National Association of 
State Utility Consumer Advocates (NASUCA). NASUCA is an association of 
41 consumer advocate offices in 38 States and the District of Columbia. 
Our members are designated by laws of their respective States to 
represent the interests of utility consumers before State and Federal 
regulators and in the courts. On behalf of the members of NASUCA, I 
wish to thank you for the opportunity to testify before this 
Subcommittee on the Public Utility Holding Company Act of 1935.
    First I would like to commend the Subcommittee for holding this 
hearing. As more States consider, implement (or reject), and reassess a 
move toward a more competitive electric generation industry, it is 
essential that Federal and State lawmakers continue to review those 
laws and regulatory actions that will either protect or harm consumer 
interests in the context of the larger debate on the structure of the 
industry.
    The question before this Subcommittee today is on the future of the 
Public Utility Holding Company Act. Yet, this issue cannot be examined 
outside the context of the entire framework of the electric utility 
industry without considering the market implications for consumers and 
competitors alike. No one has to tell this Subcommittee that the 
electric utility industry is in the midst of substantial change, 
uncertainty, and, in some places, turmoil. It is a front page, six 
o'clock lead news story. Anybody involved with this industry cannot 
escape the over-the-backyard-fence or soccer-sideline inquires from 
concerned neighbors about the possibility of what is going on out there 
happening here. So examination or possible elimination of key industry 
underpinnings cannot be done in a vacuum or viewed through the narrow 
prism of simply securities regulation. Rather, any discussion of 
substantial alteration of PUHCA must be considered in the context of 
the potential impact on industry structure, market power, and, 
ultimately, consumers.
NASUCA Resolutions
    In a series of resolutions dating back almost 20 years, NASUCA has 
urged Congress to exercise the greatest caution in response to efforts 
to dismantle the consumer protections contained in PUHCA. Specifically, 
NASUCA continues to oppose changes to PUHCA that would reduce consumer 
protections in the Act at this time. NASUCA urges Congress and the SEC 
not to take any action that would weaken the Act without first ensuring 
that public utility holding companies are either subject to effective 
competition or subject to effective regulation, where effective 
competition does not yet exist or where competition would not induce 
efficiency, reduce costs and advance consumer interests.
    Our resolutions recognize that public utility holding companies and 
their subsidiaries are affected with a national public interest and 
that their activities extending over many States are not susceptible to 
effective control by any individual State. We also recognize that 
neither the electric industry nor the natural gas industry has a fully 
competitive market structure and that utility market power remains 
pervasive. We conclude that, if PUHCA were repealed today in the manner 
proposed in S. 206, neither the remaining regulatory scheme nor the 
current State of competition would be sufficient to protect consumers. 
Until utility market power is eliminated, consumers must be protected 
by effective regulation, which includes the provisions of PUHCA.
    In NASUCA's view, effective regulation of multistate public utility 
holding companies requires both rate reviews and structural reviews, 
with a rational allocation of responsibility between State and Federal 
decision-makers.
    NASUCA recognizes that effective competition benefits consumers 
through greater efficiency and reduced costs. We also note, however, 
that deregulation under conditions of unfettered market power harms 
consumers. As such, our resolutions do not suggest that PUHCA must 
remain in its current form indefinitely. Rather, it cautions Congress 
and the SEC to take no action to weaken PUHCA without first ensuring 
that either effective competition or effective regulation is in place 
to protect consumers.
    Our concerns are not held alone. In fact, every consumer group that 
I am aware of is opposed to repeal of the Act if not accompanied by 
effective provisions to promote sustainable, competitive markets. I 
have attached a list of groups who have been on record opposing PUHCA 
repeal.
S. 206
    The legislation before us does not adequately address the concerns 
of consumer advocates across the Nation. Moreover, S. 206 would 
significantly worsen the problems associated with monopoly power. For 
example:
    1. Repeal of PUHCA's integration requirement:

 Weakens the ability of State regulators to protect ratepayers 
    (and State econ-
    omies) from monopoly abuse. A State's ability to ensure least cost 
    service is fur-
    ther confounded when the franchise owner is headquartered in 
    another State or 
    country.
 Opens the door to expanded opportunities for forum shopping 
    and Federal preemption of State commissions in the assignment of 
    generation or other costs which could be required by the FERC in 
    light of the Mississippi Power & Light Co. v. Mississippi Ex Rel. 
    Moore, Atty, 487 U.S. 354 (1988) court decision.
 Could increase the potential for nationwide or regional market 
    concentration through unrestricted acquisitions of noncontiguous 
    utilities by companies already holding substantial market power 
    without competition for, or in their own service territories at the 
    very time when we should be guarding against potentially 
    anticompetitive behavior. Elimination of competitors at the current 
    pace has the potential to restrict competition and could 
    artificially inflate prices paid by consumers if retail competition 
    is implemented.

    2. With repeal or easing of restrictions on utility 
diversification, the complexity of tracking and allocating costs and 
preventing cross-subsidization reaches a new level of difficulty. The 
goal of PUHCA modernization should be to reduce overly burdensome 
regulation. By repeal of PUHCA diversification provisions, S. 206 would 
have the opposite effect by increasing the regulatory burden.
    3. There will be a significant increase in complex holding company 
structures. This would make it much more difficult to detect and 
deflect inappropriate interaffiliate transactions between competitive 
and monopoly business components, or to prevent conflicts of interest, 
anticompetitive behavior or other market power abuses.
    4. As a result of their retail franchises and access to customers 
and information, electric utility holding companies retain an 
unmistakable advantage in many nonutility markets. Without addressing 
the fundamentals of this market power problem, S. 206 would permit 
utilities to harm competition in both utility and nonutility 
businesses. As a result, economic efficiency would be reduced, 
consumers harmed and small companies put out of business.
    5. As evidenced in the SEC survey of State utility commissions 
complete a few years ago, many State regulators lack adequate authority 
to fill in regulatory gaps left by PUHCA repeal. Moreover, even if 
States have legal authority to fill the gaps, they may not have the 
resources, particularly as franchise owners become highly diversified 
and geographically distant, as S. 206 would permit.
    While it is laudable that S. 206 includes a continued Federal 
presence in policing interaffiliate transactions, audits and access to 
books and records, it falls short in providing all of the necessary 
tools to the FERC with respect to policing interaffiliate transactions. 
It even exempts key affiliates from having to provide access to books 
and records. This legislation eliminates two provisions, the provisions 
addressing diversification and the integration limitations, which 
remain at the heart of the Act today despite the representations of 
some registered holding companies.
    Proponents of repeal or major modification of PUHCA have 
incorrectly characterized the nature of the electricity industry today: 
It is not, as is claimed, a competitive industry. In fact, even in 
States that have restructured, little or no competition actually 
exists. Regulation, in the form of price caps and reductions, is the 
only tool that has resulted in lower prices for consumers. Furthermore, 
State regulation is not, contrary to repeal proponents, sufficient to 
protect consumers in the absence of a Federal statute regulating 
multistate public utility holding companies.
    The factor motivating Sam Rayburn in 1935 to take on the power 
trusts and push for enactment of PUHCA--market power--still exists in 
the 2001. Since 1935, the structure of the industry has been greatly 
influenced by the Act. Changes in PUHCA, without ensuring effective 
competition and effective regulation in those sectors where each (or 
both) is appropriate, will harm consumers.
Market Power
    Congress and Federal agencies must address the need to mitigate 
market power. The exercise of market power is likely in industry 
structures that include natural monopolies over essential facilities 
such as transmission and distribution systems, or in joint ownership of 
monopoly and potentially competitive businesses. In the electricity 
industry today, these conditions remain. These conditions are not 
present in other industries, where there is no exclusive franchise to 
sell at retail.
    If Congress repeals PUHCA and its integration requirement without 
tying relief to a showing of effective competition or divestiture, then 
these very large utility companies can expand their monopoly customer, 
billing, transmission and distribution monopolies at will to ward off 
competitors. This places such utilities at a tremendously unfair 
advantage prior to the onset of competition and will allow the utility 
to acquire other utilities and their service territories without facing 
competition within their own service territory or realistically be 
subject to acquisition by even larger competitors.
    And, contrary to claims you may hear, PUHCA does not in any manner 
prevent or limit the ability of utilities to build generation. 
Wholesale generators--or EWG's--are specifically exempted from the Act. 
So repeal of PUHCA will do nothing to alleviate the current energy 
crisis. In fact, repeal, as stated above, would only exacerbate 
monopoly power and manipulation of markets.
    Where there are monopolies, especially with government-granted 
utility service franchises, the primary obligation is to core 
customers. No costs associated with an off-system investment, or with 
regulating such an investment to protect captive customers, should be 
borne by ratepayers. Unfortunately, effective means for denying the 
pass-through of unwarranted interaffiliate costs for multistate holding 
companies do not always exist at the State level. In fact, the 
Mississippi Power and Light court decision (Mississippi Power and Light 
Co. ex rel Moore) places consumers at continued and expanded risk from 
harm as a result of inappropriate costs potentially being allocated by 
a Federal agency even if the State has denied prudence of such costs. 
This may increasingly be the case as holding companies acquire 
disparate service territories. S. 206 does nothing to correct this 
regulatory gap. The very existence of such a regulatory gap will place 
consumers at risk.
    Proponents of repeal argue that structural review is unnecessary 
because rate regulators can protect consumers. That is simply not the 
case. Rate review and structural review are complementary, and both are 
vital in ensuring fair rates and in preventing abuses. For example, PUHCA 
prevents holding companies from abusing corporate form to benefit their 
shareholders at the expense of consumers and competitors. They were 
designed as such when Congress enacted the twin Federal Power Act and 
PUHCA statutes. After-the-fact rate regulation alone cannot prevent or 
correct large investment errors, which may harm the ratepayers and 
the general public.
    Second, State commissions do not have or may be prevented from 
using all the necessary tools to prevent harms to ratepayers and the 
public. For instance, the SEC/NARUC survey indicates that many States 
lack the legal authority to prevent certain out-of-State affiliations 
by a holding company located in another State, but owning the operating 
utility in the PUC's jurisdiction. In addition to the Mississippi Power 
and Light decision, other gaps include Ohio Power v. FERC, 954 F.2d 779 
(D.C. Cir), cert. denied, 113 S.Ct. 483 (1992). While S. 206 appears to 
address the Ohio Power gap prospectively, it does nothing to address 
the regulatory gap created by MP&L.
    Finally, States may not be the only appropriate jurisdictions to 
decide when a particular acquisition of a distant utility creates too 
much market power or concentration of control. So, structural 
regulation of multistate holding companies still requires a Federal 
role in addressing interaffiliate transactions, acquisitions of 
nonutility subsidiaries, acquisitions of distant utility companies, and 
mergers. Given current flaws in the structure of electricity markets, 
these changes are too substantial to adopt without ensuring the 
appropriate mix of effective regulation and effective competition.
    After all, it is PUHCA itself, with its structural protections and 
outright bans of certain actions, transactions and behaviors that 
cannot be replaced or matched by S. 206 or other poor substitutes. Some 
parts of PUHCA still prevent anticompetitive and anticonsumer behavior.
    The Committee should take a closer look at who is for and against 
stand-alone PUHCA repeal. The primary proponents of repeal are most of 
the registered holding companies and the SEC. Opponents include the 
Consumers for Fair Competition, all major consumer groups, representing 
residential, commercial and industrial customers, heating and air 
conditioning contractors, municipal electric and cooperative 
organizations, the National Association of Regulatory Utility 
Commissioners, and many other organizations.
Conclusion
    I would like to conclude by urging this Subcommittee to consider 
any changes to the Public Utility Holding Company Act be done only in 
the context of the larger structure of the industry. As you have heard, 
the industry is evolving and that evolution has not been painless. We 
must first determine the appropriate market structure and nature of 
competition within the industry to evaluate the appropriate methods for 
balancing effective competition and effective regulation. If this is 
not achieved, consumers will not benefit, and will likely bear the 
brunt of any deregulatory actions.
    NASUCA urges the Subcommittee not to repeal or weaken the consumer 
protections in PUHCA as embodied in S. 206 or other legislation without 
first ensuring that public utilities are subject to effective 
competition, or effective regulation, where competition would not 
induce efficiency, reduce costs and advance the interest of consumers. 
Legislation such as S. 206 does not meet such a standard.
    Such legislation is inappropriate. At both the State and Federal 
levels throughout the Nation, the structure of the electric and gas 
utility industries are being debated. However, it is still unclear what 
will be the outcome in many States. If we have learned anything from 
California, it is that the world is evolving in ways which we cannot 
anticipate the results. To repeal the anti-empire building statute at 
such a time when structural abuses could become the order of the day 
would be dangerous.
    Thank you again for the opportunity to speak on behalf of NASUCA.

                   PREPARED STATEMENT OF MARTY KANNER

        Coordinator, On Behalf of Consumers for Fair Competition

                             March 29, 2001

    Consumers for Fair Competition (CFC)--an ad hoc coalition of 
residential and industrial consumer representatives, small business 
interests, local regulators, public interest groups, and public and 
private utilities--was formed to advance policies necessary to promote 
effective competition. The coalition believes meaningful competition 
will not take hold or survive if steps are not taken to address the 
market dominance of incumbent utilities.
    You will hear assertions that the Public Utility Holding Company 
Act (PUHCA) is no more than an out-dated statute intended to protect 
investors from fraudulent securities practices. Do not be misled. 
Congress enacted PUHCA as a companion statute to the Federal Power Act. 
PUHCA establishes passive restraints on the structure of the electric 
utility industry in order to mitigate market power, preclude practices 
abusive to captive consumers, and facilitate effective regulation.
    Stand-alone PUHCA repeal, as embodied in S. 206, eliminates these 
structural protections. Moreover, they do not include the policy 
prescriptions needed to promote meaningful competition. Such action 
will expose captive consumers to a myriad of potential risks. Rather 
than ushering in competition as repeal proponents would have you 
believe, stand-alone PUHCA repeal will have substantial anti-
competitive repercussions and retard the development of a vibrantly 
competitive electricity market.
    The current administration of PUHCA has clear limitations. However, 
its underlying purpose--the mitigation of market power and prevention 
of interaffiliate transactions and utility diversifications that 
threaten captive ratepayers--is the best policy option for a successful 
transition to a competitive marketplace. It is for that reason that 
every major consumer group--as well as numerous other interests--
opposes stand-alone PUHCA repeal.
    CFC has prepared provisions to provide the necessary checks on 
potential anticompetitive behavior. With adoption of these provisions, 
Congress could repeal PUHCA.
Underlying Purpose of PUHCA
    As noted above, PUHCA establishes certain structural safeguards to 
protect consumers and facilitate effective rate regulation. Under the 
Act:

 Multistate utility holding companies must be physically and 
    operationally integrated in order to ensure economic benefits and 
    facilitate effective regulation;
 Holding company acquisitions are limited in order to promote 
    economic and operational efficiencies and prevent undue 
    concentration;
 Multistate utility holding company diversification activities 
    are restricted in order to maintain a focus on the core business of 
    utility service to captive consumers, limit financial risks to 
    ratepayers, and protect businesses in unregulated industries from 
    anticompetitive cross-subsidies;
 Inter-affiliate transactions are limited in order to prevent 
    undue favoritism and self-dealing; and
 Capital structures and holding company investments are 
    regulated in order to protect captive ratepayers from unwarranted 
    financial risk.

    Proponents of PUHCA repeal would have you believe that the Act only 
regulates the multistate holding companies that are ``registered'' 
under the Act. In fact, PUHCA's ``passive restraints'' effectively 
regulate the corporate behavior of the remaining investor-owned 
utilities that have structured their operations in a manner designed to 
avoid the restrictions applicable to registered holding companies.
    In some cases, the benefits outlined above have been diluted by lax 
regulation by the Securities and Exchange Commission (SEC) or 
circumscribed by targeted amendments adopted by Congress. But such past 
actions do not justify wholesale repeal. Rather they require a careful 
consideration of the following questions:

 What structural protections are needed to facilitate and 
    maintain a competitive market?
 What form, extend and duration of regulation is needed in a 
    competitive market?
 Are further targeted amendments to PUHCA sufficient to redress 
    a regulatory redundancy or changed circumstances?
 What--as noted economist Alfred Kahn put it--is the best 
    possible mix of inevitably imperfect regulation and inevitably 
    imperfect competition?
Consumer Protections Are Still Needed
    Proponents of stand-alone PUHCA repeal argue that the statute is 
unneeded, a relic of a bygone day when all functions of the industry 
were monopolistic, State commissions were in their infancy, and securities 
regulation was undeveloped. As Congressman John Dingell once noted: 
``times have changed, but human nature has not.''
    It is not ``evil'' that businesses seek market dominance. It is the 
nature of business. The difference between the utility industry and 
other businesses, however, is the continued monopoly structure of 
distribution and transmission function (and the retail energy service 
business in many States). This straddling of monopoly and competitive 
markets warrants continued structural protections.
    An office supply store might cross-subsidize staplers with paper 
clips, but a dissatisfied customer can always go elsewhere to buy paper 
clips. A company might diversify into another business line and face 
financial losses or even ruin--but there are no captive customers that 
suffer the consequences.
    A dissatisfied utility customer cannot simply shop elsewhere; nor 
is that customer insulated from the bad business decisions of its 
supplier. Closer scrutiny reveals that consumers can face considerable 
risks under stand-alone PUHCA repeal.

1. Financial Repercussions of Poor Financial Practices
    As noted above, PUHCA discourages diversification into nonutility 
businesses and regulates capital structure. In the absence of these 
protections, holding companies can diversify into risky ventures, 
pledge utility assets as collateral, and loan funds from utility 
operations to nonutility affiliates. Such actions can raise the cost of 
capital for the utility, siphon funds that should be invested in the 
core utility operations, and result in unnecessarily high rates.
    None of the pending PUHCA-repeal proposals requires holding 
companies to exclusively use nonrecourse debt, preclude interaffiliate 
loans, or otherwise insulate captive consumers from risky financial 
transactions.

2. Cross-Subsidization Taxes Consumers
    Holding companies can subsidize nonregulated ventures with captive 
ratepayer funds or resources.
    For instance, a holding company could establish an affiliate to 
market surplus power from its generating facilities. The underlying 
costs of the facilities are paid by captive ratepayers. The affiliate 
marketer simply covers the variable cost of production and captures 
significant profits--for the holding company--from its power sales. The 
stand-alone PUHCA repeal proposals do not affirmatively prohibit cross-
subsidization, and State regulation is inadequate to prevent siphoning 
of ratepayer dollars in a holding company structure.

3. Consumers Fail to Benefit From Successful Diversification
    As noted above, consumers face potential risk from failed 
unregulated ventures. They also may benefit--through lower rates--if 
such ventures are successful.
    A holding company could transfer a formerly rate-based, low-cost 
generating plant to an unregulated marketing affiliate--without pre-
approval by all the relevant State commissions--for the embedded cost 
of the facility, thereby denying captive retail customers of the 
economic benefit of the facility and potentially exacerbating stranded 
cost exposure.
    Alternately, a holding company could build a fiber optic system, 
with a small portion used for core utility operations (such as load 
control), and the remaining capacity operated as or leased to a 
competitive telecommunications provider. Given the economies of scale 
in fiber optic cable, captive utility customers could pay the majority 
of the underlying costs and not receive the economic benefits of the 
use of the remaining facilities.
    The PUHCA repeal proposals limit State commission review of the 
transfer of assets and fail to require fair compensation to consumers 
for the transfer of ratepayer financed assets.

4. Captive Retail Service Becomes the Poor Stepsister
    The provision of quality, affordable retail electric service to 
captive customers is likely to suffer. Holding companies will transfer 
the best and brightest personnel to those affiliates that hold the 
greatest potential for financial reward. Local utilities may become the 
corporate backwater.
    One registered holding company established a subsidiary to manage 
and operate nuclear plants for other utilities. Despite assurances to 
local regulators, the top nuclear personnel of the utility spent most 
of their time on the subsidiaries activities, potentially degrading the 
operation and economic efficiency of the ``core'' utility's nuclear 
plants. Given the limited resources of regulatory agencies and the 
difficulty of tracking personnel, neither State commission nor FERC 
rate regulation can remedy such actions.

Competitive Protections Are Still Needed
    The structural restrictions of PUHCA not only protect consumers, 
they also encourage fair competition.

1. Competitors Protected From Unfair Cross-Subsidization
    By limiting diversification into nonregulated businesses, PUCHA 
protects competitive industries from the entrance of players that can 
tap monopoly markets for unfair competitive advantage.
    In the absence of PUCHA, a holding company could establish an 
affiliate, as outlined above, to market surplus power from rate-based 
facilities, with the affiliate simply covering the variable cost of 
production. In such a circumstance, a nonutility competitor would have 
to sell power at a rate that recovered both fixed and variable cost, 
while the holding company affiliate had its fixed costs subsidized by 
captive ratepayers. Holding companies could similarly use ratepayer-
financed equipment, personnel and information to cross-subsidize entry 
into a host of energy services businesses. None of the PUHCA-repeal 
proposals protect competitors from unfair cross-subsidization.

2. Undue Favoritism to Affiliates
    As a result of their monopoly status, utilities possess access to 
key customer information. For instance, a utility could have exclusive 
knowledge of the operational efficiency (and potential market for cost-effective upgrades) of the motors of an industrial customer. Such 
information would provide an affiliate energy services company with an 
unfair competitive advantage. Similarly, knowledge of customer 
consumption patterns, price sensitivity, and power quality requirements 
could provide advantages to affiliate equipment suppliers, equipment 
installers, and retail marketers. This information can be passed on 
directly to affiliates, or through the transfer or rotation of key 
personnel. None of the PUHCA repeal proposals require holding companies 
to provide competitors with comparable access to information obtained 
from monopoly affiliates.

3. Market Concentration
    Registered holding companies are dominant market players. One even 
made light of this fact in its annual report--musing that it was an 
800-pound gorilla.
    Repeal of PUHCA facilitates increased growth and market 
concentration. While intermittently enforced, the Act requires 
acquisitions to advance the public interest, provide enhanced economic 
and operational efficiency, maintain physical integration and not 
result in undue concentration. Absent these requirements, the industry 
is likely to further consolidate. Holding company acquisitions of 
distant utilities are unlikely to be reviewed by the State regulators 
of the acquiring holding company--due to a lack of legal authority--and 
even FERC's revised merger guidelines do not appear to discourage such 
actions. Moreover, FERC lacks legal authority to review holding company 
to holding company mergers.
    In addition, PUHCA precludes the acquisition of gas utilities by 
registered electric holding companies (or electric utilities by gas 
holding companies). The authority of FERC to review such 
``convergence'' mergers is limited. If PUHCA is repealed on a stand-
alone basis, the industry is likely to become dominated by a few large 
companies--the antithesis of a competitive market, which is 
characterized by a multiplicity of participants and the absence of 
barriers to market entry. The proposals before you fail to revise 
FERC's merger authority to screen the competitive implications of 
proposed mergers or establish clear authority to review gas and 
electric combinations or holding company to holding company mergers.

4. Selective Market Entry
    Stand-alone PUHCA repeal will enable holding companies to 
participate in those retail markets that are open to competition--
either as pilot projects or under State retail competition plans. As 
noted above, it is possible for these competitive ventures to be cross-
subsidized by captive retail customers of the holding company. But 
while holding companies will receive the potential benefits of retail 
competition, they are not subject to the challenges of competition in 
their ``home'' market. Stand-alone PUHCA repeal enables holding 
companies to leverage government-sanctioned market power--their retail 
monopolies--to engage in competitive markets.
The Case for Stand-Alone PUHCA Repeal is Not Compelling
    Proponents of stand-alone PUHCA repeal advance a variety of very 
unconvincing arguments.

 They argue that the Act was only intended to protect 
    investors, ignoring the clear--and expressly intended--consumer 
    benefits;
 They argue that it will advance competition, ignoring the 
    potential anticompetitive consequences;
 They argue that PUHCA discourages domestic investment, while 
    ignoring the myriad of legal, domestic investment opportunities and 
    their own business decisions to invest abroad in search of higher 
    returns;
 They argue that States will be the primary protectors of 
    consumers, while ignoring--and not redressing--the legal 
    limitations of State commissions.

    To the extent that PUHCA poses legitimate restrictions--for 
instance duplicative securities regulation or an inability to purchase 
generating assets for direct sales in competitive retail markets--then 
Congress should consider targeted amendments; not wholesale repeal.
How to Advance Consumer and Competitive Interests
    PUHCA repeal, in the absence of appropriate safeguards, will harm 
consumers. And the transition to competition will fail if a competitive 
structure is not established. CFC has drafted model legislation to 
guide Congress in moving toward a competitive market.
    The coalition urges Congress to:

 Ensure that the transmission grid operates independent of 
    electricity market participants;
 Alleviate overly-concentrated generation markets that will 
    sustain high prices, entry barriers and inefficient markets;
 Scrutinize the competitive implications of all utility 
    mergers;
 Provide enforceable standards to prevent utility cross-
    subsidization.

    These authorities would be tied to the competitive condition of the 
marketplace. Regulatory action would trigger only when the likelihood 
of market failure was present.
Conclusion
    Stand-alone PUHCA repeal should not be seen as the ``appropriate 
first step'' toward competition. True competition rewards efficiency 
and penalizes inefficiency. Stand-alone PUHCA repeal provides utility-
holding companies with the benefits of competition, without the 
associated risks. The risks are borne by consumers and competitors.
    Given these severe policy implications, PUCHA repeal must be 
considered only within the context of comprehensive legislation. In 
that way, Congress can determine the extent and form of regulation 
needed to supplement the discipline of a competitive market.
    The members of Consumers for Fair Competition stand ready to assist 
this Subcommittee in crafting those policies needed to promote 
effective competition and consumer protection.

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