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77–694 PDF ★(STAR PRINT) 2002

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

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN ENSIGN, Nevada

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

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

MIKE CRAPO, Idaho

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

JON S. CORZINE, New Jersey

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

KATHERINE MCGUIRE, Staff Director

JOEL OSWALD, Professional Staff Member

(II)

CONTENTS

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)

(1)

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.

2

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 activity 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.

3

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.

4

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.

5

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.

6

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 crosssubsidization 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 exempVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 77694.TXT SBANK4 PsN: SBANK4
7

tive 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 CaliVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 77694.TXT SBANK4 PsN: SBANK4
8

fornia, 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 ratepayers 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

9

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.

10

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 marketbased 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 reVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 77694.TXT SBANK4 PsN: SBANK4
11

peal 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.

12

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

13

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 ratepayer 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.

14

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.

15

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.

16

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 elecVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 77694.TXT SBANK4 PsN: SBANK4
17

tricity to the California market. Again, PUHCA stands in the way.

A new transmission line is needed which California’s investorowned 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 reVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 77694.TXT SBANK4 PsN: SBANK4
18

moved 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 soccersidelines 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 underpinnings 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.

19

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

20

seek market dominance in an attempt to squash competition. Midmanagers 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.

21

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.

22

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.

23

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,

24

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?

25

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.

26

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?

27

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.

28

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.

29

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 crosssubsidization. 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?

30

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:]

31

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,

32

1See 1935 Act section 1(b), 15 U.S.C. § 79a(b). 2See 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).

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.

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

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 administration 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

33

3The 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. 4Sections 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. 5The 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. 6The 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).

statute that remain appropriate in the regulation of the contemporary electric and

gas industries.3

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 thencurrent 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

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

34

7 Emera Inc., the owner of Nova Scotia Power, has announced a deal to acquire Bangor HydroElectric Company and has applied for an order approving the transaction. See SEC File No. 70–

9087 (application filed Nov. 6, 2000).

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.

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

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8See FERC Order 2000, ‘‘Regional Transmission Organizations,’’ 65 FR 810 (Jan. 6, 2000)

(codified at 18 C.F.R. § 35.34). 9The 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. § 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. § 80b–6a and section 36 of the Securities and Exchange Act of 1934, 15 U.S.C.

§ 78mm. Section 28 of the Securities Act of 1933, 15 U.S.C. § 77z–3, grants the Commission similar exemptive authority, but permits it to exercise it only pursuant to a rulemaking.

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 crosssubsidization 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.

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.

36

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

37

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);

38

• 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:

39

(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 management 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.

40

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 fuVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 77694.TXT SBANK4 PsN: SBANK4
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1 A complete list of the companies forming the Coalition is set forth in Attachment 1.

ture 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.

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:

42

• 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, wholeVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 77694.TXT SBANK4 PsN: SBANK4
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sale 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

44

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 shortterm 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.

45

46

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 MidAmerican 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 realworld 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 reVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 77694.TXT SBANK4 PsN: SBANK4
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sults 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 MidAmerican, 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.

48

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.

49

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

50

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 economies) from monopoly abuse. A State’s ability to ensure least cost service is further 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 antiVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 77694.TXT SBANK4 PsN: SBANK4
51

competitive 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 compaVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 77694.TXT SBANK4 PsN: SBANK4
52

nies 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.

53

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?

54

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 crosssubsidization, 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

55

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.

56

• 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.

57

59

1

II

Calendar No. 36

107TH CONGRESS

1ST SESSION S. 206

[Report No. 107–15]

To repeal the Public Utility Holding Company Act of 1935, to enact the

Public Utility Holding Company Act of 2001, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JANUARY 30, 2001

Mr. SHELBY (for himself, Mr. MURKOWSKI, Mr. SARBANES, Mr. GRAMM, Mr.

DODD, Mr. LOTT, Mr. CRAIG, Mr. CRAPO, Mr. BROWNBACK, Mr. COCHRAN, Mr. GRAHAM, Mr. BUNNING, and Mr. NICKLES) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs

MAY 9, 2001

Reported by Mr. GRAMM, with an amendment

[Strike out all after the enacting clause and insert the part printed in italic]

A BILL

To repeal the Public Utility Holding Company Act of 1935,

to enact the Public Utility Holding Company Act of

2001, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

60

2

•S 206 RS

1 SECTION 1. SHORT TITLE.

2 This Act may be cited as the ‘‘Public Utility Holding

3 Company Act of 2001’’.

4 SEC. 2. FINDINGS AND PURPOSES.

5 (a) FINDINGS.—Congress finds that—

6 (1) the Public Utility Holding Company Act of

7 1935 was intended to facilitate the work of Federal

8 and State regulators by placing certain constraints

9 on the activities of holding company systems;

10 (2) developments since 1935, including changes

11 in other regulation and in the electric and gas indus12 tries, have called into question the continued rel13 evance of the model of regulation established by that

14 Act;

15 (3) there is a continuing need for State regula16 tion in order to ensure the rate protection of utility

17 customers; and

18 (4) limited Federal regulation is necessary to

19 supplement the work of State commissions for the

20 continued rate protection of electric and gas utility

21 customers.

22 (b) PURPOSES.—The purposes of this Act are—

23 (1) to eliminate unnecessary regulation, yet

24 continue to provide for consumer protection by facili25 tating existing rate regulatory authority through im26 proved Federal and State commission access to

61

3

•S 206 RS

1 books and records of all companies in a holding com2 pany system, to the extent that such information is

3 relevant to rates paid by utility customers, while af4 fording companies the flexibility required to compete

5 in the energy markets; and

6 (2) to address protection of electric and gas

7 utility customers by providing for Federal and State

8 access to books and records of all companies in a

9 holding company system that are relevant to utility

10 rates.

11 SEC. 3. DEFINITIONS.

12 For purposes of this Act—

13 (1) the term ‘‘affiliate’’ of a company means

14 any company, 5 percent or more of the outstanding

15 voting securities of which are owned, controlled, or

16 held with power to vote, directly or indirectly, by

17 such company;

18 (2) the term ‘‘associate company’’ of a company

19 means any company in the same holding company

20 system with such company;

21 (3) the term ‘‘Commission’’ means the Federal

22 Energy Regulatory Commission;

23 (4) the term ‘‘company’’ means a corporation,

24 partnership, association, joint stock company, busi25 ness trust, or any organized group of persons,

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1 whether incorporated or not, or a receiver, trustee,

2 or other liquidating agent of any of the foregoing;

3 (5) the term ‘‘electric utility company’’ means

4 any company that owns or operates facilities used

5 for the generation, transmission, or distribution of

6 electric energy for sale;

7 (6) the terms ‘‘exempt wholesale generator’’

8 and ‘‘foreign utility company’’ have the same mean9 ings as in sections 32 and 33, respectively, of the

10 Public Utility Holding Company Act of 1935 (15

11 U.S.C. 79z–5a, 79z–5b), as those sections existed on

12 the day before the effective date of this Act;

13 (7) the term ‘‘gas utility company’’ means any

14 company that owns or operates facilities used for

15 distribution at retail (other than the distribution

16 only in enclosed portable containers or distribution

17 to tenants or employees of the company operating

18 such facilities for their own use and not for resale)

19 of natural or manufactured gas for heat, light, or

20 power;

21 (8) the term ‘‘holding company’’ means—

22 (A) any company that directly or indirectly

23 owns, controls, or holds, with power to vote, 10

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1 rities of a public utility company or of a holding

2 company of any public utility company; and

3 (B) any person, determined by the Com4 mission, after notice and opportunity for hear5 ing, to exercise directly or indirectly (either

6 alone or pursuant to an arrangement or under7 standing with one or more persons) such a con8 trolling influence over the management or poli9 cies of any public utility company or holding

10 company as to make it necessary or appropriate

11 for the rate protection of utility customers with

12 respect to rates that such person be subject to

13 the obligations, duties, and liabilities imposed

14 by this Act upon holding companies;

15 (9) the term ‘‘holding company system’’ means

16 a holding company, together with its subsidiary com17 panies;

18 (10) the term ‘‘jurisdictional rates’’ means

19 rates established by the Commission for the trans20 mission of electric energy in interstate commerce,

21 the sale of electric energy at wholesale in interstate

22 commerce, the transportation of natural gas in inter23 state commerce, and the sale in interstate commerce

24 of natural gas for resale for ultimate public conVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 77694.TXT SBANK4 PsN: SBANK4
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1 sumption for domestic, commercial, industrial, or

2 any other use;

3 (11) the term ‘‘natural gas company’’ means a

4 person engaged in the transportation of natural gas

5 in interstate commerce or the sale of such gas in

6 interstate commerce for resale;

7 (12) the term ‘‘person’’ means an individual or

8 company;

9 (13) the term ‘‘public utility’’ means any person

10 who owns or operates facilities used for transmission

11 of electric energy in interstate commerce or sales of

12 electric energy at wholesale in interstate commerce;

13 (14) the term ‘‘public utility company’’ means

14 an electric utility company or a gas utility company;

15 (15) the term ‘‘State commission’’ means any

16 commission, board, agency, or officer, by whatever

17 name designated, of a State, municipality, or other

18 political subdivision of a State that, under the laws

19 of such State, has jurisdiction to regulate public util20 ity companies;

21 (16) the term ‘‘subsidiary company’’ of a hold22 ing company means—

23 (A) any company, 10 percent or more of

24 the outstanding voting securities of which are

25 directly or indirectly owned, controlled, or held

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1 with power to vote, by such holding company;

2 and

3 (B) any person, the management or poli4 cies of which the Commission, after notice and

5 opportunity for hearing, determines to be sub6 ject to a controlling influence, directly or indi7 rectly, by such holding company (either alone or

8 pursuant to an arrangement or understanding

9 with one or more other persons) so as to make

10 it necessary for the rate protection of utility

11 customers with respect to rates that such per12 son be subject to the obligations, duties, and li13 abilities imposed by this Act upon subsidiary

14 companies of holding companies; and

15 (17) the term ‘‘voting security’’ means any se16 curity presently entitling the owner or holder thereof

17 to vote in the direction or management of the affairs

18 of a company.

19 SEC. 4. REPEAL OF THE PUBLIC UTILITY HOLDING COM20 PANY ACT OF 1935.

21 The Public Utility Holding Company Act of 1935 (15

22 U.S.C. 79 et seq.) is repealed.

23 SEC. 5. FEDERAL ACCESS TO BOOKS AND RECORDS.

24 (a) IN GENERAL.—Each holding company and each

25 associate company thereof shall maintain, and shall make

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1 available to the Commission, such books, accounts, memo2 randa, and other records as the Commission deems to be

3 relevant to costs incurred by a public utility or natural

4 gas company that is an associate company of such holding

5 company and necessary or appropriate for the protection

6 of utility customers with respect to jurisdictional rates.

7 (b) AFFILIATE COMPANIES.—Each affiliate of a hold8 ing company or of any subsidiary company of a holding

9 company shall maintain, and shall make available to the

10 Commission, such books, accounts, memoranda, and other

11 records with respect to any transaction with another affil12 iate, as the Commission deems to be relevant to costs in13 curred by a public utility or natural gas company that is

14 an associate company of such holding company and nec15 essary or appropriate for the protection of utility cus16 tomers with respect to jurisdictional rates.

17 (c) HOLDING COMPANY SYSTEMS.—The Commission

18 may examine the books, accounts, memoranda, and other

19 records of any company in a holding company system, or

20 any affiliate thereof, as the Commission deems to be rel21 evant to costs incurred by a public utility or natural gas

22 company within such holding company system and nec23 essary or appropriate for the protection of utility cus24 tomers with respect to jurisdictional rates.

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1 (d) CONFIDENTIALITY.—No member, officer, or em2 ployee of the Commission shall divulge any fact or infor3 mation that may come to his or her knowledge during the

4 course of examination of books, accounts, memoranda, or

5 other records as provided in this section, except as may

6 be directed by the Commission or by a court of competent

7 jurisdiction.

8 SEC. 6. STATE ACCESS TO BOOKS AND RECORDS.

9 (a) IN GENERAL.—Upon the written request of a

10 State commission having jurisdiction to regulate a public

11 utility company in a holding company system, the holding

12 company or any associate company or affiliate thereof,

13 other than such public utility company, wherever located,

14 shall produce for inspection books, accounts, memoranda,

15 and other records that—

16 (1) have been identified in reasonable detail in

17 a proceeding before the State commission;

18 (2) the State commission deems are relevant to

19 costs incurred by such public utility company; and

20 (3) are necessary for the effective discharge of

21 the responsibilities of the State commission with re22 spect to such proceeding.

23 (b) LIMITATION.—Subsection (a) does not apply to

24 any person that is a holding company solely by reason of

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1 ownership of one or more qualifying facilities under the

2 Public Utility Regulatory Policies Act of 1978.

3 (c) CONFIDENTIALITY OF INFORMATION.—The pro4 duction of books, accounts, memoranda, and other records

5 under subsection (a) shall be subject to such terms and

6 conditions as may be necessary and appropriate to safe7 guard against unwarranted disclosure to the public of any

8 trade secrets or sensitive commercial information.

9 (d) EFFECT ON STATE LAW.—Nothing in this sec10 tion shall preempt applicable State law concerning the pro11 vision of books, records, or any other information, or in

12 any way limit the rights of any State to obtain books,

13 records, or any other information under any other Federal

14 law, contract, or otherwise.

15 (e) COURT JURISDICTION.—Any United States dis16 trict court located in the State in which the State commis17 sion referred to in subsection (a) is located shall have ju18 risdiction to enforce compliance with this section.

19 SEC. 7. EXEMPTION AUTHORITY.

20 (a) RULEMAKING.—Not later than 90 days after the

21 effective date of this Act, the Commission shall promul22 gate a final rule to exempt from the requirements of sec23 tion 5 any person that is a holding company, solely with

24 respect to one or more—

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1 (1) qualifying facilities under the Public Utility

2 Regulatory Policies Act of 1978;

3 (2) exempt wholesale generators; or

4 (3) foreign utility companies.

5 (b) OTHER AUTHORITY.—The Commission shall ex6 empt a person or transaction from the requirements of

7 section 5, if, upon application or upon the motion of the

8 Commission—

9 (1) the Commission finds that the books,

10 records, accounts, memoranda, and other records of

11 any person are not relevant to the jurisdictional

12 rates of a public utility or natural gas company; or

13 (2) the Commission finds that any class of

14 transactions is not relevant to the jurisdictional

15 rates of a public utility or natural gas company.

16 SEC. 8. AFFILIATE TRANSACTIONS.

17 Nothing in this Act shall preclude the Commission

18 or a State commission from exercising its jurisdiction

19 under otherwise applicable law to determine whether a

20 public utility company, public utility, or natural gas com21 pany may recover in rates any costs of an activity per22 formed by an associate company, or any costs of goods

23 or services acquired by such public utility company from

24 an associate company.

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1 SEC. 9. APPLICABILITY.

2 No provision of this Act shall apply to, or be deemed

3 to include—

4 (1) the United States;

5 (2) a State or any political subdivision of a

6 State;

7 (3) any foreign governmental authority not op8 erating in the United States;

9 (4) any agency, authority, or instrumentality of

10 any entity referred to in paragraph (1), (2), or (3);

11 or

12 (5) any officer, agent, or employee of any entity

13 referred to in paragraph (1), (2), or (3) acting as

14 such in the course of his or her official duty.

15 SEC. 10. EFFECT ON OTHER REGULATIONS.

16 Nothing in this Act precludes the Commission or a

17 State commission from exercising its jurisdiction under

18 otherwise applicable law to protect utility customers.

19 SEC. 11. ENFORCEMENT.

20 The Commission shall have the same powers as set

21 forth in sections 306 through 317 of the Federal Power

22 Act (16 U.S.C. 825e–825p) to enforce the provisions of

23 this Act.

24 SEC. 12. SAVINGS PROVISIONS.

25 (a) IN GENERAL.—Nothing in this Act prohibits a

26 person from engaging in or continuing to engage in activiVerDate 11-MAY-2000 09:40 Apr 10, 2002 Jkt 000000 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 77694.TXT SBANK4 PsN: SBANK4
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1 ties or transactions in which it is legally engaged or au2 thorized to engage on the effective date of this Act.

3 (b) EFFECT ON OTHER COMMISSION AUTHORITY.—

4 Nothing in this Act limits the authority of the Commission

5 under the Federal Power Act (16 U.S.C. 791a et seq.)

6 (including section 301 of that Act) or the Natural Gas

7 Act (15 U.S.C. 717 et seq.) (including section 8 of that

8 Act).

9 SEC. 13. IMPLEMENTATION.

10 Not later than 18 months after the date of enactment

11 of this Act, the Commission shall—

12 (1) promulgate such regulations as may be nec13 essary or appropriate to implement this Act (other

14 than section 6); and

15 (2) submit to the Congress detailed rec16 ommendations on technical and conforming amend17 ments to Federal law necessary to carry out this Act

18 and the amendments made by this Act.

19 SEC. 14. TRANSFER OF RESOURCES.

20 All books and records that relate primarily to the

21 functions transferred to the Commission under this Act

22 shall be transferred from the Securities and Exchange

23 Commission to the Commission.

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1 SEC. 15. EFFECTIVE DATE.

2 This Act shall take effect 18 months after the date

3 of enactment of this Act.

4 SEC. 16. AUTHORIZATION OF APPROPRIATIONS.

5 There are authorized to be appropriated such funds

6 as may be necessary to carry out this Act.

7 SEC. 17. CONFORMING AMENDMENT TO THE FEDERAL

8 POWER ACT.

9 Section 318 of the Federal Power Act (16 U.S.C.

10 825q) is repealed.

11 SECTION 1. SHORT TITLE.

12 (a) SHORT TITLE; TABLE OF CONTENTS.—This Act

13 may be cited as the ‘‘Public Utility Holding Company Act

14 of 2001’’.

15 (b) TABLE OF CONTENTS.—The table of contents for

16 this Act is as follows:

Sec. 1. Short title.

Sec. 2. Findings and purposes.

Sec. 3. Definitions.

Sec. 4. Repeal of the Public Utility Holding Company Act of 1935.

Sec. 5. Federal access to books and records.

Sec. 6. State access to books and records.

Sec. 7. Exemption authority.

Sec. 8. Affiliate transactions.

Sec. 9. Applicability.

Sec. 10. Effect on other regulations.

Sec. 11. Enforcement.

Sec. 12. Savings provisions.

Sec. 13. Implementation.

Sec. 14. Transfer of resources.

Sec. 15. Inter-agency review of competition in the wholesale and retail markets

for electric energy.

Sec. 16. GAO study on implementation.

Sec. 17. Effective date.

Sec. 18. Authorization of appropriations.

Sec. 19. Conforming amendment to the Federal Power Act.

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1 SEC. 2. FINDINGS AND PURPOSES.

2 (a) FINDINGS.—Congress finds that—

3 (1) the Public Utility Holding Company Act of

4 1935 was intended to facilitate the work of Federal

5 and State regulators by placing certain constraints

6 on the activities of holding company systems;

7 (2) developments since 1935, including changes

8 in other regulation and in the electric and gas indus9 tries, have called into question the continued relevance

10 of the model of regulation established by that Act;

11 (3) there is a continuing need for State regula12 tion in order to ensure the rate protection of utility

13 customers; and

14 (4) limited Federal regulation is necessary to

15 supplement the work of State commissions for the

16 continued rate protection of electric and gas utility

17 customers.

18 (b) PURPOSES.—The purposes of this Act are—

19 (1) to eliminate unnecessary regulation, yet con20 tinue to provide for consumer protection by facili21 tating existing rate regulatory authority through im22 proved Federal and State commission access to books

23 and records of all companies in a holding company

24 system, to the extent that such information is relevant

25 to rates paid by utility customers, while affording

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1 companies the flexibility required to compete in the

2 energy markets; and

3 (2) to address protection of electric and gas util4 ity customers by providing for Federal and State ac5 cess to books and records of all companies in a hold6 ing company system that are relevant to utility rates.

7 SEC. 3. DEFINITIONS.

8 For purposes of this Act—

9 (1) the term ‘‘affiliate’’ of a company means any

10 company, 5 percent or more of the outstanding voting

11 securities of which are owned, controlled, or held with

12 power to vote, directly or indirectly, by such com13 pany;

14 (2) the term ‘‘associate company’’ of a company

15 means any company in the same holding company

16 system with such company;

17 (3) the term ‘‘Commission’’ means the Federal

18 Energy Regulatory Commission;

19 (4) the term ‘‘company’’ means a corporation,

20 partnership, association, joint stock company, busi21 ness trust, or any organized group of persons, whether

22 incorporated or not, or a receiver, trustee, or other

23 liquidating agent of any of the foregoing;

24 (5) the term ‘‘electric utility company’’ means

25 any company that owns or operates facilities used for

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1 the generation, transmission, or distribution of elec2 tric energy for sale;

3 (6) the terms ‘‘exempt wholesale generator’’ and

4 ‘‘foreign utility company’’ have the same meanings as

5 in sections 32 and 33, respectively, of the Public Util6 ity Holding Company Act of 1935 (15 U.S.C. 79z–5a,

7 79z–5b), as those sections existed on the day before the

8 effective date of this Act;

9 (7) the term ‘‘gas utility company’’ means any

10 company that owns or operates facilities used for dis11 tribution at retail (other than the distribution only in

12 enclosed portable containers or distribution to tenants

13 or employees of the company operating such facilities

14 for their own use and not for resale) of natural or

15 manufactured gas for heat, light, or power;

16 (8) the term ‘‘holding company’’ means—

17 (A) any company that directly or indirectly

18 owns, controls, or holds, with power to vote, 10

19 percent or more of the outstanding voting securi20 ties of a public utility company or of a holding

21 company of any public utility company; and

22 (B) any person, determined by the Commis23 sion, after notice and opportunity for hearing, to

24 exercise directly or indirectly (either alone or

25 pursuant to an arrangement or understanding

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1 with one or more persons) such a controlling in2 fluence over the management or policies of any

3 public utility company or holding company as to

4 make it necessary or appropriate for the rate

5 protection of utility customers with respect to

6 rates that such person be subject to the obliga7 tions, duties, and liabilities imposed by this Act

8 upon holding companies;

9 (9) the term ‘‘holding company system’’ means a

10 holding company, together with its subsidiary compa11 nies;

12 (10) the term ‘‘jurisdictional rates’’ means rates

13 established by the Commission for the transmission of

14 electric energy in interstate commerce, the sale of elec15 tric energy at wholesale in interstate commerce, the

16 transportation of natural gas in interstate commerce,

17 and the sale in interstate commerce of natural gas for

18 resale for ultimate public consumption for domestic,

19 commercial, industrial, or any other use;

20 (11) the term ‘‘natural gas company’’ means a

21 person engaged in the transportation of natural gas

22 in interstate commerce or the sale of such gas in

23 interstate commerce for resale;

24 (12) the term ‘‘person’’ means an individual or

25 company;

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1 (13) the term ‘‘public utility’’ means any person

2 who owns or operates facilities used for transmission

3 of electric energy in interstate commerce or sales of

4 electric energy at wholesale in interstate commerce;

5 (14) the term ‘‘public utility company’’ means

6 an electric utility company or a gas utility company;

7 (15) the term ‘‘State commission’’ means any

8 commission, board, agency, or officer, by whatever

9 name designated, of a State, municipality, or other

10 political subdivision of a State that, under the laws

11 of such State, has jurisdiction to regulate public util12 ity companies;

13 (16) the term ‘‘subsidiary company’’ of a holding

14 company means—

15 (A) any company, 10 percent or more of the

16 outstanding voting securities of which are di17 rectly or indirectly owned, controlled, or held

18 with power to vote, by such holding company;

19 and

20 (B) any person, the management or policies

21 of which the Commission, after notice and oppor22 tunity for hearing, determines to be subject to a

23 controlling influence, directly or indirectly, by

24 such holding company (either alone or pursuant

25 to an arrangement or understanding with one or

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1 more other persons) so as to make it necessary

2 for the rate protection of utility customers with

3 respect to rates that such person be subject to the

4 obligations, duties, and liabilities imposed by

5 this Act upon subsidiary companies of holding

6 companies; and

7 (17) the term ‘‘voting security’’ means any secu8 rity presently entitling the owner or holder thereof to

9 vote in the direction or management of the affairs of

10 a company.

11 SEC. 4. REPEAL OF THE PUBLIC UTILITY HOLDING COM12 PANY ACT OF 1935.

13 The Public Utility Holding Company Act of 1935 (15

14 U.S.C. 79 et seq.) is repealed.

15 SEC. 5. FEDERAL ACCESS TO BOOKS AND RECORDS.

16 (a) IN GENERAL.—Each holding company and each

17 associate company thereof shall maintain, and shall make

18 available to the Commission, such books, accounts, memo19 randa, and other records as the Commission deems to be

20 relevant to costs incurred by a public utility or natural gas

21 company that is an associate company of such holding com22 pany and necessary or appropriate for the protection of

23 utility customers with respect to jurisdictional rates.

24 (b) AFFILIATE COMPANIES.—Each affiliate of a hold25 ing company or of any subsidiary company of a holding

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1 company shall maintain, and shall make available to the

2 Commission, such books, accounts, memoranda, and other

3 records with respect to any transaction with another affil4 iate, as the Commission deems to be relevant to costs in5 curred by a public utility or natural gas company that is

6 an associate company of such holding company and nec7 essary or appropriate for the protection of utility customers

8 with respect to jurisdictional rates.

9 (c) HOLDING COMPANY SYSTEMS.—The Commission

10 may examine the books, accounts, memoranda, and other

11 records of any company in a holding company system, or

12 any affiliate thereof, as the Commission deems to be rel13 evant to costs incurred by a public utility or natural gas

14 company within such holding company system and nec15 essary or appropriate for the protection of utility customers

16 with respect to jurisdictional rates.

17 (d) CONFIDENTIALITY.—No member, officer, or em18 ployee of the Commission shall divulge any fact or informa19 tion that may come to his or her knowledge during the

20 course of examination of books, accounts, memoranda, or

21 other records as provided in this section, except as may be

22 directed by the Commission or by a court of competent ju23 risdiction.

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1 SEC. 6. STATE ACCESS TO BOOKS AND RECORDS.

2 (a) IN GENERAL.—Upon the written request of a State

3 commission having jurisdiction to regulate a public utility

4 company in a holding company system, the holding com5 pany or any associate company or affiliate thereof, other

6 than such public utility company, wherever located, shall

7 produce for inspection books, accounts, memoranda, and

8 other records that—

9 (1) have been identified in reasonable detail in

10 a proceeding before the State commission;

11 (2) the State commission deems are relevant to

12 costs incurred by such public utility company; and

13 (3) are necessary for the effective discharge of the

14 responsibilities of the State commission with respect

15 to such proceeding.

16 (b) LIMITATION.—Subsection (a) does not apply to

17 any person that is a holding company solely by reason of

18 ownership of one or more qualifying facilities under the

19 Public Utility Regulatory Policies Act of 1978 (16 U.S.C.

20 2601 et seq.).

21 (c) CONFIDENTIALITY OF INFORMATION.—The produc22 tion of books, accounts, memoranda, and other records

23 under subsection (a) shall be subject to such terms and con24 ditions as may be necessary and appropriate to safeguard

25 against unwarranted disclosure to the public of any trade

26 secrets or sensitive commercial information.

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1 (d) EFFECT ON STATE LAW.—Nothing in this section

2 shall preempt applicable State law concerning the provision

3 of books, records, or any other information, or in any way

4 limit the rights of any State to obtain books, records, or

5 any other information under any other Federal law, con6 tract, or otherwise.

7 (e) COURT JURISDICTION.—Any United States district

8 court located in the State in which the State commission

9 referred to in subsection (a) is located shall have jurisdic10 tion to enforce compliance with this section.

11 SEC. 7. EXEMPTION AUTHORITY.

12 (a) RULEMAKING.—Not later than 90 days after the

13 effective date of this Act, the Commission shall promulgate

14 a final rule to exempt from the requirements of section 5

15 any person that is a holding company, solely with respect

16 to one or more—

17 (1) qualifying facilities under the Public Utility

18 Regulatory Policies Act of 1978 (16 U.S.C. 2601 et

19 seq.);

20 (2) exempt wholesale generators; or

21 (3) foreign utility companies.

22 (b) OTHER AUTHORITY.—The Commission shall ex23 empt a person or transaction from the requirements of sec24 tion 5, if, upon application or upon the motion of the

25 Commission—

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1 (1) the Commission finds that the books, records,

2 accounts, memoranda, and other records of any per3 son are not relevant to the jurisdictional rates of a

4 public utility or natural gas company; or

5 (2) the Commission finds that any class of trans6 actions is not relevant to the jurisdictional rates of a

7 public utility or natural gas company.

8 SEC. 8. AFFILIATE TRANSACTIONS.

9 (a) COMMISSION AUTHORITY UNAFFECTED.—Nothing

10 in this Act shall limit the authority of the Commission

11 under the Federal Power Act (16 U.S.C. 791a et seq.) to

12 require that jurisdictional rates are just and reasonable, in13 cluding the ability to deny or approve the pass through of

14 costs, the prevention of cross-subsidization, and the promul15 gation of such rules and regulations as are necessary or ap16 propriate for the protection of utility consumers.

17 (b) RECOVERY OF COSTS.—Nothing in this Act shall

18 preclude the Commission or a State commission from exer19 cising its jurisdiction under otherwise applicable law to de20 termine whether a public utility company, public utility,

21 or natural gas company may recover in rates any costs of

22 an activity performed by an associate company, or any

23 costs of goods or services acquired by such public utility

24 company from an associate company.

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1 SEC. 9. APPLICABILITY.

2 Except as otherwise specifically provided in this Act,

3 no provision of this Act shall apply to, or be deemed to

4 include—

5 (1) the United States;

6 (2) a State or any political subdivision of a

7 State;

8 (3) any foreign governmental authority not oper9 ating in the United States;

10 (4) any agency, authority, or instrumentality of

11 any entity referred to in paragraph (1), (2), or (3);

12 or

13 (5) any officer, agent, or employee of any entity

14 referred to in paragraph (1), (2), or (3) acting as

15 such in the course of his or her official duty.

16 SEC. 10. EFFECT ON OTHER REGULATIONS.

17 Nothing in this Act precludes the Commission or a

18 State commission from exercising its jurisdiction under oth19 erwise applicable law to protect utility customers.

20 SEC. 11. ENFORCEMENT.

21 The Commission shall have the same powers as set

22 forth in sections 306 through 317 of the Federal Power Act

23 (16 U.S.C. 825e–825p) to enforce the provisions of this Act.

24 SEC. 12. SAVINGS PROVISIONS.

25 (a) IN GENERAL.—Nothing in this Act prohibits a per26 son from engaging in or continuing to engage in activities

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1 or transactions in which it is legally engaged or authorized

2 to engage on the effective date of this Act.

3 (b) EFFECT ON OTHER COMMISSION AUTHORITY.—

4 Nothing in this Act limits the authority of the Commission

5 under the Federal Power Act (16 U.S.C. 791a et seq.) (in6 cluding section 301 of that Act) or the Natural Gas Act

7 (15 U.S.C. 717 et seq.) (including section 8 of that Act).

8 SEC. 13. IMPLEMENTATION.

9 Not later than 18 months after the date of enactment

10 of this Act, the Commission shall—

11 (1) promulgate such regulations as may be nec12 essary or appropriate to implement this Act (other

13 than section 6); and

14 (2) submit to the Congress detailed recommenda15 tions on technical and conforming amendments to

16 Federal law necessary to carry out this Act and the

17 amendments made by this Act.

18 SEC. 14. TRANSFER OF RESOURCES.

19 All books and records that relate primarily to the func20 tions transferred to the Commission under this Act shall

21 be transferred from the Securities and Exchange Commis22 sion to the Commission.

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1 SEC. 15. INTER-AGENCY REVIEW OF COMPETITION IN THE

2 WHOLESALE AND RETAIL MARKETS FOR

3 ELECTRIC ENERGY.

4 (a) TASK FORCE.—There is established an inter-agen5 cy task force, to be known as the ‘‘Electric Energy Market

6 Competition Task Force’’ (referred to in this section as the

7 ‘‘task force’’), which shall consist of—

8 (1) 1 member each from—

9 (A) the Department of Justice, to be ap10 pointed by the Attorney General of the United

11 States;

12 (B) the Federal Energy Regulatory Com13 mission, to be appointed by the chairman of that

14 Commission; and

15 (C) the Federal Trade Commission, to be

16 appointed by the chairman of that Commission;

17 and

18 (2) 2 advisory members (who shall not vote), of

19 whom—

20 (A) 1 shall be appointed by the Secretary of

21 Agriculture to represent the Rural Utility Serv22 ice; and

23 (B) 1 shall be appointed by the Chairman

24 of the Securities and Exchange Commission to

25 represent that Commission.

26 (b) STUDY AND REPORT.—

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1 (1) STUDY.—The task force shall perform a

2 study and analysis of the protection and promotion

3 of competition within the wholesale and retail market

4 for electric energy in the United States.

5 (2) REPORT.—

6 (A) FINAL REPORT.—Not later than 1 year

7 after the effective date of this Act, the task force

8 shall submit a final report of its findings under

9 paragraph (1) to the Congress.

10 (B) PUBLIC COMMENT.—At least 60 days

11 before submission of a final report to the Con12 gress under subparagraph (A), the task force

13 shall publish a draft report in the Federal Reg14 ister to provide for public comment.

15 (c) FOCUS.—The study required by this section shall

16 examine—

17 (1) the best means of protecting competition

18 within the wholesale and retail electric market;

19 (2) activities within the wholesale and retail

20 electric market that may allow unfair and unjustified

21 discriminatory and deceptive practices;

22 (3) activities within the wholesale and retail

23 electric market, including mergers and acquisitions,

24 that deny market access or suppress competition;

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1 (4) cross-subsidization that may occur between

2 regulated and nonregulated activities; and

3 (5) the role of State public utility commissions

4 in regulating competition in the wholesale and retail

5 electric market.

6 (d) CONSULTATION.—In performing the study required

7 by this section, the task force shall consult with and solicit

8 comments from its advisory members, the States, represent9 atives of the electric power industry, and the public.

10 SEC. 16. GAO STUDY ON IMPLEMENTATION.

11 (a) STUDY.—The Comptroller General shall conduct a

12 study of the success of the Federal Government and the

13 States during the 18-month period following the effective

14 date of this Act in—

15 (1) the prevention of anticompetitive practices

16 and other abuses by public utility holding companies,

17 including cross-subsidization and other market power

18 abuses; and

19 (2) the promotion of competition and efficient

20 energy markets to the benefit of consumers.

21 (b) REPORT TO CONGRESS.—Not earlier than 18

22 months after the effective date of this Act or later than 24

23 months after that effective date, the Comptroller General

24 shall submit a report to the Congress on the results of the

25 study conducted under subsection (a), including probable

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1 causes of its findings and recommendations to the Congress

2 and the States for any necessary legislative changes.

3 SEC. 17. EFFECTIVE DATE.

4 This Act shall take effect 18 months after the date of

5 enactment of this Act.

6 SEC. 18. AUTHORIZATION OF APPROPRIATIONS.

7 There are authorized to be appropriated such funds as

8 may be necessary to carry out this Act.

9 SEC. 19. CONFORMING AMENDMENT TO THE FEDERAL

10 POWER ACT.

11 Section 318 of the Federal Power Act (16 U.S.C. 825q)

12 is repealed.