United States Government Accountability Office

GAO Testimony 

Before the Committee on Energy and 

Natural Resources, U.S. Senate 

UTILITY REGULATION

Opportunities Exist to 

Improve Oversight 

Statement of Mark Gaffigan, Director 

Natural Resources and Environment 

For Release on Delivery

Expected at 9:30 a.m. EDT

Thursday, May 1, 2008

 

GAO-08-752T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 1, 2007

UTILITY REGULATION

Opportunities Exist to Improve Oversight 

Highlights of GAO-08-752T, a testimony 

before the Committee on Energy and 

Natural Resources, U.S. Senate 

Under the Public Utility Holding

Company Act of 1935 (PUHCA 

1935) and other laws, federal 

agencies and state commissions 

have traditionally regulated utilities 

to protect consumers from supply 

disruptions and unfair pricing. The 

Energy Policy Act of 2005 (EPAct)

repealed PUHCA 1935, removing

some limitations on the companies 

that could merge with or invest in

utilities, and leaving the Federal 

Energy Regulatory Commission 

(FERC), which already regulated 

utilities, with primary federal 

responsibility for regulating them. 

Because of the potential for new

mergers or acquisitions between 

utilities and companies previously 

restricted from investing in

utilities, there has been 

considerable interest in whether

cross-subsidization—unfairly 

passing on to consumers the cost

of transactions between utility

companies and their “affiliates”––

could occur.

GAO was asked to testify on its 

February 2008 report, Utility 

Oversight: Recent Changes in Law 

Call for Improved Vigilance by

FERC (GAO-08-289), which (1) 

examined the extent to which 

FERC changed its merger review

and post merger oversight since 

EPAct to protect against crosssubsidization and (2) surveyed 

state utility commissions about 

their oversight. In this report, GAO 

recommended that FERC adopt a 

risk-based approach to auditing 

and improve its audit reports, 

among other things. The FERC 

Chairman disagreed with the need

for our recommendations, but GAO 

maintains that implementing them

would improve oversight. 

In its February 2008 report, GAO reported that FERC had made few 

substantive changes to either its merger review process or its post merger 

oversight since EPAct and, as a result, does not have a strong basis for 

ensuring that harmful cross-subsidization does not occur. FERC officials told

GAO that they plan to require merging companies to disclose any crosssubsidization and to certify in writing that they will not engage in unapproved 

cross-subsidization. After mergers have taken place, FERC intends to rely on 

its existing enforcement mechanisms—primarily companies’ self-reporting 

noncompliance and a limited number of compliance audits—to detect 

potential cross-subsidization. FERC officials told us that they believe the 

threat of the large fines allowed under EPAct will encourage companies to 

investigate and self-report noncompliance. To augment self-reporting, FERC 

officials told us that, in 2008, they are using an informal plan to reallocate 

their limited audit staff to audit the affiliate transactions of 3 of the 36 holding 

companies it regulates. In planning these compliance audits, FERC officials

told us that they do not formally consider companies’ risk for noncompliance 

––a factor that financial auditors and other experts told us is an important 

consideration in allocating audit resources. Rather, they rely on informal 

discussions between senior FERC managers and staff. Moreover, we found 

that FERC’s audit reporting approach results in audit reports that often lack a 

clear description of the audit objectives, scope, methodology, and findings—

inhibiting their use to stakeholders. 

GAO’s survey of state utility commissions found that states’ views varied on 

their current regulatory capacities to review utility mergers and acquisitions 

and oversee affiliate transactions; however many states reported a need for 

additional resources, such as staff and funding, to respond to changes in 

oversight after the repeal of PUHCA 1935. All but a few states have the 

authority to approve mergers, but many states expressed concern about their 

ability to regulate the resulting companies. In recent years, two state 

commissions denied mergers, in part because of these concerns. Most states

also have some type of authority to approve, review, and audit affiliate 

transactions, but many states review or audit only a small percentage of the 

transactions; 28 of the 49 states that responded to our survey question about 

auditing said they audited 1 percent or fewer transactions over the last five

years. In addition, although almost all states reported that they had access to 

financial books and records from utilities to review affiliate transactions, 

many states reported they do not have such direct access to the books and 

records of holding companies or their affiliated companies. While EPAct 

provides state regulators the ability to obtain such information, some states 

expressed concern that this access could require them to be extremely 

specific in identifying needed information, thus potentially limiting their audit

access. Finally, 22 of the 50 states that responded to our survey question 

about resources said that they need additional staffing or funding, or both, to 

respond to changes that resulted from EPAct, and 8 states have proposed or 

actually increased staffing since EPAct was enacted. To view the full product, including the scope 

and methodology, click on GAO-08-752T. 

For more information, contact Mark Gaffigan 

at (202) 512-3841 or gaffiganm@gao.gov. 
Utility Regulation

Mr. Chairman and Members of the Committee: 

Thank you for the opportunity to discuss our work on federal and state 

efforts to protect against potential cross-subsidization in the utility 

industry after the repeal of the Public Utility Holding Company Act of 1935 

(PUHCA 1935). Public utilities sell about $325 billion worth of electricity

and natural gas to more than 140 million customers in U.S. homes and 

businesses each year. These utilities may face the need to invest 

potentially hundreds of billions of dollars to expand and upgrade the 

utility infrastructure over the next 10 years. Oversight of utilities is carried 

out by the federal government and state commissions––with the federal

role focused on regulation of interstate transmission and wholesale 

markets and the states’ role focused on regulating retail markets. These 

federal and state regulators seek to balance efforts to protect utility 

consumers from potential supply disruptions and unfair pricing practices 

while ensuring that utilities are profitable enough to attract private 

investment. Traditionally, this regulation took place within the framework 

of PUHCA 1935 and other federal laws. In 2005, the Energy Policy Act 

(EPAct) repealed PUHCA 1935, removing some limitations on the 

companies that could merge with or invest in utilities and opening the 

sector to new investment. The repeal of PUHCA 1935 has raised concerns 

about whether the remaining laws and regulations strike an appropriate 

balance between encouraging investment in the utility sector and 

protecting consumers. 

PUHCA 1935 was a response to the rapid expansion, consolidation, and 

subsequent bankruptcies in the utility sector during the early part of the 

20th century. Prior to its enactment, utilities were regulated by state 

commissions. As utilities grew, they began to span across multiple states 

that often had different rules and jurisdictional authority, making it 

difficult for state utility commissions to effectively regulate them. By the 

1920s, as a result of mergers and acquisitions, utilities were largely 

controlled by a handful of complex corporations––called holding 

companies––many of which owned several utilities as well as other 

companies. In many cases, the companies within these holding

companies—called affiliates—sold a wide range of goods and services to

utilities, such as fuel for power plants. Since the rates utility customers 

pay generally include the cost of all the goods and services bought to serve 

them, some transactions between these affiliates allowed the utilities to 

take advantage of economies of scale to the benefit of utility customers, 

such as when utilities effectively shared the cost of legal and other 

administrative services with affiliates instead of each company 

maintaining staff and other resources to provide these services separately.

Page 1 GAO-08-752T
Utility Regulation

However, affiliate transactions that were priced unfairly could inflate 

customers’ rates to subsidize operations outside the utility—called crosssubsidization. Compounding this complex web of corporate ownership 

and affiliate transactions, poor disclosure of financial information and 

limited access to financial records made it difficult for investors to 

accurately assess the utilities’ financial health. Many of these holding 

companies were involved in risky business ventures outside the utility 

industry and had pledged utility assets to support those investments. 

Partly as a result of the poor financial disclosure and the complex web of 

corporate ownership and affiliate transactions, many utilities went into 

bankruptcy during the financial collapse followed by the Great Depression.

To restore public confidence after the Depression, the federal government 

undertook three efforts that influenced the regulation of utilities. First, to 

protect investors, including utility investors, the federal government 

created the Securities and Exchange Commission (SEC) in 1934. SEC 

established rules––including improved financial reporting––for the 

financial markets and publicly traded companies participating in those 

markets, as well as a means to regulate them. Second, to protect utility 

customers, the federal government enacted the Federal Power Act of 1935

which served, and continues to serve today, as the foundation of federal 

regulatory authority related to regulation of public utilities, and 

empowered the Federal Energy Regulatory Commission (FERC) to serve 

as the primary federal regulator of utilities.1

 As such, FERC became 

responsible for overseeing interstate transmission of electricity, wholesale 

sales of electricity to resellers (e.g., sales by utilities to other utilities), and 

reviewing proposed mergers or acquisitions involving companies it 

regulates. In its role of regulating interstate transmission and wholesale 

sales, FERC has been responsible for approving prices (i.e., rates) for the 

use of transmission lines and the sales of electricity in wholesale 

markets—also commonly called “rate setting.” As part of that process, 

FERC has determined which costs, including affiliate transaction costs, 

may be lawfully included in rates. Third, the federal government enacted

PUHCA 1935 to regulate investment in the utility industry and protect 

investors and consumers from potential abuses such as crosssubsidization by holding companies. SEC was responsible for 

administering PUHCA, including reviewing mergers or acquisitions 

involving holding companies. To that end, SEC was given primary 

 1

The Federal Power Act of 1935 empowered the Federal Power Commission, the 

predecessor to FERC. 

Page 2 GAO-08-752T
Utility Regulation

responsibility for examining and determining how to allocate affiliate 

transaction costs for holding companies it regulates. Among other things, 

PUHCA limited the formation of new holding companies that were not 

physically connected by electric power lines, and prohibited existing 

holding companies from acquiring more than one utility, unless the 

utilities were physically connected by power lines. Over time, other 

statutory and regulatory changes reduced some of the strict limitations 

PUHCA 1935 initially imposed. 

Over the past two decades, some interested parties in the utility industry 

sought repeal of PUHCA 1935, arguing that it was a roadblock to the 

private investment that could reduce the cost of improvements to the 

utility infrastructure, and noting that several federal antitrust laws that 

apply to utility companies have been passed since PUHCA was enacted.

Opponents of PUHCA 1935’s repeal, including some business and 

consumer representatives, expressed concern that its repeal would 

encourage utilities to return to the kinds of risky business ventures that 

spawned it, and that utilities would again become too complex to 

effectively regulate, potentially raising prices for consumers. Business 

groups outside the utility industry were also concerned that utilities could 

use their monopolies to cross-subsidize investments into other kinds of 

businesses and harm competition in those industries. 

In 2005, EPAct repealed PUHCA 1935––thereby opening the sector to new 

investment––and replaced it with PUHCA 2005. The repeal of EPAct 1935 

eliminated SEC’s oversight role in regulating utility holding companies or 

preventing cross-subsidies, giving FERC new authorities to regulate 

corporate structures and transactions.

2

 FERC’s expanded authorities fall 

into two broad areas: 1) FERC was required to ensure at the point of the 

merger review that the proposed merger would not result in harmful crosssubsidization, and 2) FERC became the principal federal agency 

responsible for determining how costs for affiliate transactions should be 

allocated for all utility holding companies. To help FERC better oversee 

these transactions, EPAct provided FERC specific postmerger access to 

the books, accounts, memos, and financial records of utility owners and 

their affiliates and subsidiaries, and granted state utility commissions 

 2

The SEC will continue enforcing laws and regulations governing the issuance of securities 

and regular financial reporting by public companies. The Department of Justice and the 

Federal Trade Commission will continue their long-standing enforcement of antitrust laws.

These include the premerger provisions of the Hart-Scott-Rodino Antitrust Improvements 

Act of 1976 and Section 7 of the Clayton Act. 

Page 3 GAO-08-752T
Utility Regulation

similar access. Furthermore, EPAct expanded FERC’s civil penalty 

authority to help it enforce its new requirements, providing the 

commission the ability to levy penalties of up to $1 million per day per 

violation. After EPAct, states continue to play key roles overseeing utilities

and reviewing mergers, including conducting some audits of affiliate 

transactions. 

My testimony today will focus on our February 2008 report, Utility 

Oversight: Recent Changes in Law Call for Improved Vigilance by FERC

(GAO-08-289), which examined: (1) the extent to which FERC, since 

EPAct’s enactment, has changed its merger or acquisition review process 

and postmerger or acquisition oversight to ensure that potential harmful 

cross-subsidization by utilities does not occur; and (2) the views of state 

utility commissions regarding their current capacity, in terms of 

regulations and resources, to oversee utilities. For that report, we 

reviewed relevant reports and data, interviewed key officials, visited four 

states––California, New Jersey, Oregon, and Wisconsin––that had or were 

considering implementing strong protections for overseeing holding and 

related affiliate companies, and surveyed state utility regulators in all 50 

states and the District of Columbia. We performed our review from May 

2006 through February 2008 in accordance with generally accepted 

government auditing standards. Those standards require that we plan and

perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable

basis for our findings and conclusions based on our audit objectives. 

In summary, we found: 

• FERC has made few substantive changes to either its merger review 

process or its postmerger oversight since EPAct and, as a result, does not

have a strong basis for ensuring that harmful cross-subsidization does not

occur. FERC officials told us that they plan to require merging companies

to disclose existing or planned cross-subsidization and to certify in writing 

that they will not engage in unapproved cross-subsidization. Once mergers 

have taken place, FERC intends to rely on its existing enforcement 

mechanisms—primarily companies’ self-reporting noncompliance and a 

limited number of compliance audits—to detect potential crosssubsidization. FERC officials told us that they believe the threat of large 

fines, as allowed by EPAct, will encourage companies to investigate and 

self-report noncompliance. To augment self-reporting, FERC officials told 

us that they are using an informal plan to reallocate their limited audit 

staff to conduct affiliate transaction audits of 3 of the 36 holding 

Page 4 GAO-08-752T
Utility Regulation

companies it regulates in 2008. In planning these compliance audits, FERC 

officials told us that they do not formally consider companies’ risk for 

noncompliance––a factor that financial auditors and other experts told us 

is an important consideration in allocating audit resources––relying 

instead on informal discussions between senior FERC managers and staff. 

Moreover, we found that FERC’s audit reporting approach results in audit 

reports that often lack a clear description of the audit objectives, scope, 

methodology, and findings—inhibiting their use to stakeholders. 

• Although states’ views varied on their current regulatory capacities to 

review utility mergers and acquisitions and oversee affiliate transactions, 

many states reported a need for additional resources, such as staff and 

funding, to respond to changes in oversight after the repeal of PUHCA 

1935. All but a few states have merger approval authority, but many states 

expressed concern about their ability to regulate the resulting companies

after merger approval. In recent years, two state commissions denied 

mergers, in part because of these concerns. Most states also have some 

type of authority to approve, review, and audit affiliate transactions, but 

many states review or audit only a small percentage of the transactions, 

with 28 of the 49 reporting states auditing 1 percent or less over the last 

five years. In addition, although almost all states reported that they had 

access to financial books and records from utilities to review affiliate 

transactions, many states reported they do not have such direct access to 

the books and records of holding companies or their affiliated companies. 

While EPAct provides state regulators the ability to obtain such 

information, some states expressed concern that this access could require 

them to be extremely specific in identifying needed information, thus 

potentially limiting their audit access. Finally, 22 of the 50 states that 

responded to our survey question about resources said that they need 

additional staffing or funding, or both, to respond to changes that resulted 

from EPAct, and 8 states have proposed or actually increased staffing 

since EPAct was enacted. 

Page 5 GAO-08-752T
In February 2008, we reported that FERC had made few substantive 

changes to either its merger and acquisition review process or its 

postmerger oversight as a consequence of its new responsibilities and, as a 

result, does not have a strong basis for ensuring that harmful crosssubsidization does not occur. Specifically: 

Reviewing mergers and acquisitions. FERC’s merger and acquisition 

review relies primarily on company disclosures and commitments not to 

cross-subsidize. FERC-regulated companies that are proposing to merge 

with or acquire a regulated company must submit a public application for

FERC to review and approve. If cross-subsidies already exist or are 

planned, companies are required to describe how these are in the public

interest by, for example identifying how the planned cross-subsidy 

benefits utility ratepayers and does not harm others. FERC also requires 

company officials to attest that they will not engage in unapproved crosssubsidies in the future. This information becomes part of a public record 

that stakeholders or other interested parties, such as state regulators, 

consumer advocates, or others may review and comment on, and FERC 

may hold a public hearing on the merger. FERC officials told us that they 

evaluate the information in the public record for the application and do 

not collect evidence or conduct separate analyses of a proposed merger. 

On the basis of this information, FERC officials told us that they determine 

which, if any, existing or planned cross-subsidies to allow, then include 

this information in detail in the final merger or acquisition order. Between 

the time EPAct was enacted in 2005 and July 10, 2007––when FERC 

provided detailed information to us––FERC had reviewed or was in the 

process of reviewing 15 mergers, acquisitions, or sales of assets. FERC had 

approved 12 mergers, although it approved three of these with conditions–

–for example, requiring the merging parties to provide further evidence of

provisions to protect customers. Of the remaining three applications, one 

application was withdrawn by the merging parties prior to FERC’s 

decision and the other two were still pending. 

Postmerger oversight. FERC’s postmerger oversight relies on its existing 

enforcement mechanisms—primarily self-reporting and a limited number 

FERC’S Merger and 

Acquisition Review 

and Postmerger 

Oversight to Prevent 

Cross-subsidization in 

Utility Holding 

Company Systems 

Are Limited 

Page 6 GAO-08-752T Utility Regulation
Utility Regulation

of compliance audits.3 FERC indicates that it places great importance on 

self-reporting because it believes companies can actively police their own

behavior through internal and external audits, and that the companies are 

in the best position to detect and correct both inadvertent and intentional 

noncompliance. FERC officials told us that they expect companies to 

become more vigilant in monitoring their behavior because FERC can now 

levy much larger fines––up to $1 million per day per violation––and that a

violating company’s actions in following this self-reporting policy, along 

with the seriousness of a potential violation, help inform FERC’s decision 

on the appropriate penalty.4

 Key stakeholders have raised concerns that 

internal company audits tend to focus on areas of highest risk to the 

company profits and, as a result, may not focus specifically on affiliate 

transactions. One company official noted that the threat of large fines may

“chill” companies’ willingness to self-report violations. Between the 

enactment of EPAct––when Congress formally highlighted its concern 

about cross-subsidization––and our February 2008 report, no companies 

had self-reported any of these types of violations. To augment selfreporting, FERC plans to conduct a limited number of compliance audits 

of holding companies each year, although at the time of our February 2008 

report, it had not completed any audits to detect whether crosssubsidization is occurring. In 2008, FERC’s plans to audit 3 of the 36 

companies it regulates—Exelon Corporation, Allegheny, Inc., and the 

Southern Company. If this rate continues, it would take FERC 12 years to 

audit each of these companies once, although FERC officials noted that 

they plan audits one year at a time and that the number of audits may 

change in future years. 

 3

FERC officials also told us that in addition to self-reporting and audits of some companies, 

they also may initiate investigations based on internal and external reports of potential 

violations. Officials told us that they are able to initiate internal investigations based on 

referrals from FERC staff such as those monitoring natural gas and electricity trading and 

markets in the market monitoring center. In addition, FERC officials noted that companies 

and individuals may report potential violators. Such reports may be made, they said,

through their “hotline” reporting system, which allows individuals to anonymously report 

suspected violations of FERC rules. In addition, individuals knowledgeable of FERC’s 

processes and rules may also report violations as formal or informal complaints that 

companies are violating the terms and conditions of the detailed FERC-approved tariffs or 

rates. FERC officials did not tell us how many such reports have been made related to 

cross-subsidies or how many of such reports resulted in cross-subsidy violations. However,

officials noted that all complaints are investigated to determine whether they have merit. 

4

FERC generally plans to retain its flexibility and discretion to decide remedies on a caseby-case basis rather than to prescribe penalties or develop formulas for different violations. 

Page 7 GAO-08-752T
Utility Regulation

We found that FERC does not use a formal risk-based approach to plan its 

compliance audits––a factor that financial auditors and other experts told 

us is an important consideration in allocating audit resources. Instead, 

FERC officials plan audits based on informal discussions between FERC’s 

Office of Enforcement, including its Division of Audits, and relevant FERC 

offices with related expertise. To obtain a more complete picture of risk, 

FERC could more actively monitor company-specific data––something it 

currently does not do. In addition, we found that FERC’s postmerger audit 

reports on affiliate transactions often lack clear information––that they 

may not always fully reflect key elements such as objectives, scope, 

methodology, and the specific audit findings, and sometimes lacked key 

information, such as the type, number, and value of affiliate transactions at 

the company involved, the percentage of all affiliate transactions tested, 

and the test results. Without this information, these audit reports are of 

limited use in assessing the risk that affiliate transactions pose for utility 

customers, shareholders, bondholders, and other stakeholders. 

In our February 2008 report, we recommended that the Chairman of the 

Federal Energy Regulatory Commission (FERC) develop a comprehensive, 

risk-based approach to planning audits of affiliate transactions to better 

target FERC’s audit resources to highest priority needs. Specifically, we 

recommended that FERC monitor the financial condition of utilities, as 

some state regulators have found useful, by leveraging analyses done by 

the financial market and developing a standard set of performance 

indicators. In addition, we recommended that FERC develop a better 

means of collaborating with state regulators to leverage audit resources 

states have already applied to enforcement efforts and to capitalize on 

state regulators’ unique knowledge. We also recommended that FERC 

develop an audit reporting approach to clearly identify the objectives, 

scope and methodology, and the specific findings of the audit to improve 

public confidence in FERC’s enforcement functions and the usefulness of 

its audit reports. The Chairman strongly disagreed with our overall 

findings and the need for our recommendations; nonetheless, we maintain 

that implementing our recommendations would enhance the effectiveness 

of FERC’s oversight. 

States utility commissions’ views of their oversight capacities vary, but 

many states foresee a need for additional resources to respond to changes

from EPAct. The survey we conducted for our February 2008 report 

highlighted the following concerns: 

States Vary in Their 

Capacities to Oversee 

Utilities 

Page 8 GAO-08-752T
Utility Regulation

• Almost all states have merger approval authority, but many states 

expressed concern about their ability to regulate the resulting 

companies. All but 3 states5

 (out of 50 responses) have authority to review 

and either approve or disapprove mergers, but their authorities varied. For 

example, one state could only disapprove a merger and, as such, allows a 

merger by taking no action to disapprove it. State regulators reported 

being mostly concerned about the impact of mergers on customer rates, 

but 25 of 45 reporting states also noted concerns that the resulting, 

potentially more complex company could be more difficult to regulate. In

recent years, the difficulty of regulating merged companies has been cited

by two state commissions––one in Montana and one in Oregon––that 

denied proposed mergers in their states. For example, a state commission 

official in Montana told us the commission denied a FERC-approved 

merger in July 2007 that involved a Montana regulated utility, whose 

headquarters was in South Dakota, which would have been bought by an 

Australian holding company. 

• Most states have authorities over affiliate transactions, but many states

report auditing few transactions. Nationally, 49 states noted they have 

some type of affiliate transaction authority, and while some states 

reported that they require periodic, specialized audits of affiliate 

transactions, 28 of the 49 reporting states reported auditing 1 percent or 

fewer over the last five years. Audit authorities vary from prohibitions 

against certain types of transactions to less restrictive requirements such 

as allowance of a transaction without prior review, but authority to 

disallow the transaction at a later time if it was deemed inappropriate. 

Only 3 states reported that affiliate transactions always needed prior 

commission approval. One attorney in a state utility commission noted 

that holding company and affiliate transactions can be very complex and 

time-consuming to review, and had concerns about having enough 

resources to do this. 

• Some states report not having access to holding company books and 

records. Although almost all states report they have access to financial

books and records from utilities to review affiliate transactions, many 

states reported they do not have such direct access to the books and 

records of holding companies or their affiliated companies. While EPAct 

provides state regulators the ability to obtain such information, some 

states expressed concern that this access could require them to be 

extremely specific in identifying needed information, which may be 

 5

 After completion of our survey, one state subsequently obtained approval from its 

legislature to review and approve future electric utility mergers. 

Page 9 GAO-08-752T
Utility Regulation

difficult. Lack of direct access, experts noted, may limit the effectiveness 

of state commission oversight and result in harmful cross-subsidization 

because the states cannot link financial risks associated with affiliated 

companies to their regulated utility customers. All of the 49 states that 

responded to this survey question noted that they require utilities to 

provide financial reports, and 8 of these states require reports that also 

include the holding company or both the holding company and the 

affiliated companies. 

• States foresee needing additional resources to respond to the changes 

from EPAct. Specifically, 22 of the 50 states that responded to our survey 

said that they need additional staffing or funding, or both, to respond to 

the changes that resulted from EPAct. Further, 6 out of 30 states raised 

staffing as a key challenge in overseeing utilities since the passage of 

EPAct, and 8 states have proposed or actually increased staffing. 

In conclusion, the repeal of PUHCA 1935 opened the door for needed 

investment in the utility industry; however, it comes at the potential cost

of complicating regulation of the industry. Further, the introduction of 

new types of investors and different corporate combinations––including 

the ownership of utilities by complex international companies, equity 

firms, or other investors with different incentives than providing 

traditional utility company services––could change the utility industry into 

something quite different than the industry that FERC and the states have 

overseen for decades. In light of these changes, we believe FERC should 

err on the side of a “vigilance first” approach to preventing potential crosssubsidization. As FERC and states approve mergers, the responsibility for 

ensuring that cross-subsidization will not occur shifts to FERC’s Office of 

Enforcement and state commission staffs. Without a risk-based approach

to guide its audit planning––the active portion of its postmerger oversight–

–FERC may be missing opportunities to demonstrate its commitment to 

ensuring that companies are not engaged in cross-subsidization at the 

expense of consumers and may not be using its audit resources in the 

most efficient and effective manner. Without reassessing its merger review 

and postmerger oversight, FERC may approve the formation of companies 

that are difficult and costly for it and states to oversee and potentially 

risky for consumers and the broader market. In addition, the lack of clear 

information in audit reports not only limits their value to stakeholders, but 

may undermine regulated companies’ efforts to understand the nature of 

FERC’s oversight concerns and to conduct internal audits to identify 

potential violations that are consistent with those conducted by FERC—

key elements in improving their self-reporting. We continue to encourage 

the FERC Chairman to consider our recommendations. 

Page 10 GAO-08-752T
Utility Regulation

Mr. Chairman, this completes my prepared statement. I would be happy to

respond to any questions you or other Members of the Committee may 

have at this time. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this testimony. For further 

information about this testimony, please contact Mark Gaffigan at (202) 

512-3841 or at gaffiganm@gao.gov. Individuals who contributed to this 

statement include Dan Haas, Randy Jones, Jon Ludwigson, Alison O’Neill, 

Anthony Padilla, and Barbara Timmerman. 

Page 11 GAO-08-752T

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Washington, DC 20548 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

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