7900 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

1Holding Co. Act Release No. 26313 (June 20,

1995), 60 FR 33642 (June 28, 1995) (‘‘Proposing

Release’’).

2The Commission has read the latter phrase to

encompass any arrangement that entails the

acquisition of a substantial interest in a nonutility

business undertaking. See, e.g., Public Service Co.

of Oklahoma, 45 S.E.C. 878, 883–4 (1975).

3S. Rep. No. 621, 74th Cong., 1st Sess. (1935)

(‘‘Senate Report’’) at 11.

4Section 11(b)(1) of the Act. Section 11(b)(1)

further provides that the Commission may so

characterize a nonutility interest that it finds to be

‘‘necessary or appropriate in the public interest or

for the protection of investors or consumers and not

detrimental to the proper functioning of such

system. * * *’’

The interests of investors and consumers and the

public interest are the protected interests under the

Holding Company Act. The Commission has

interpreted the public interest standard of the Act

to extend to the interest in a sound gas and electric

utility industry. See Eastern Utilities Assocs.,

Holding Co. Act Release No. 26232 (Feb. 15, 1995).

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 250 and 259

[Release No. 35–26667; File No. S7–12–95]

RIN 3235–AG46

Exemption of Acquisition by

Registered Public-Utility Holding

Companies of Securities of Nonutility

Companies Engaged in Certain

Energy-Related and Gas-Related

Activities; Exemption of Capital

Contributions and Advances to Such

Companies

AGENCY: Securities and Exchange

Commission.

ACTION: Final rule.

SUMMARY: The Commission is adopting

new rule 58 and conforming

amendments to rules 45(b) and 52(b)

under the Public Utility Holding

Company Act of 1935 (‘‘Holding

Company Act’’ or ‘‘Act’’). Rule 58

exempts from the requirement of prior

Commission approval a direct or

indirect acquisition by a registered

holding company or its subsidiary of an

interest in an ‘‘energy-related

company,’’ as defined in the rule,

subject to certain limitations and

reporting requirements; and by a gas

registered holding company or its

subsidiary of an interest in a ‘‘gasrelated company,’’ as defined in the

rule, subject to certain reporting

requirements. The rule and related rule

amendments eliminate unnecessary

regulatory limitations on investments in

certain businesses that are closely

related to the core utility business of the

registered system while establishing

disclosure and reporting requirements

that promote the public interest and

serve to protect consumers and

investors.

EFFECTIVE DATE: March 24, 1997.

FOR FURTHER INFORMATION CONTACT:

Bonnie Wilkinson, Assistant Director,

Martha Cathey Baker, Senior Special

Counsel, Sidney L. Cimmet, Senior

Special Counsel, or Robert P. Wason,

Chief Financial Analyst, all at (202)

942–0545, Office of Public Utility

Regulation, Division of Investment

Management, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The

Commission today is adopting rule 58

and related amendments to rule 45(b)

and rule 52(b) (17 CFR 250.45(b) and

250.52(b)) under the Public Utility

Holding Company Act of 1935 (15

U.S.C. 79a et seq.). The Commission

issued a release proposing rule 58 and

the amendments to the existing rules on

June 20, 1995.1 Subject to certain

conditions, rule 58 provides an

exemption, pursuant to section 9(c)(3) of

the Act, from the requirement of prior

Commission approval under sections

9(a)(1) and 10, for acquisitions by

registered holding companies and their

subsidiaries of securities of companies

engaged in activities with which the

Commission is familiar as a result of its

administrative experience and which

are so closely related to the ordinary

course of the utility business as not to

require case-by-case analysis under

sections 9(a)(1) and 10.

Rule 58 exempts from the requirement

of prior approval the acquisition by a

registered holding company or its

subsidiary company of any securities of

an energy-related company, subject to

certain limitations and reporting

requirements. The rule defines an

energy-related company as one that

derives, or will derive, substantially all

of its revenues from one or more

activities specifically enumerated in the

rule. The exemption provided by the

rule will be available only if the

aggregate investment by the registered

holding company and its subsidiaries in

energy-related companies does not

exceed the greater of $50 million or 15%

of consolidated capitalization.

Rule 58 also exempts from the

requirement of prior approval the

acquisition by a gas registered holding

company or its subsidiary company of

any securities of a gas-related company,

subject to certain reporting

requirements. The rule defines a gasrelated company as one that derives, or

will derive, substantially all of its

revenues from one or more activities

permitted under the Gas Related

Activities Act of 1990 (‘‘GRAA’’).

Rule 58 requires a registered holding

company that seeks to rely upon the

rule to file with this Commission and

each state commission having

jurisdiction over the retail rates of the

registered system operating companies a

quarterly report disclosing acquisitions

pursuant to the rule and certain other

information required by proposed Form

U–9C–3. The reporting requirements are

intended to enable the Commission and

the state and local regulatory authorities

to monitor acquisitions pursuant to the

rule, including any transactions with

rule 58 companies involving the

operating companies in registered

systems.

The Commission is also adopting

amendments to rule 45(b) and rule

52(b), which concern financings by

registered system companies, in each

case to conform the rules to the

limitations of rule 58. Rule 45(b) is

amended to qualify the exception that

the rule creates to the requirement of

Commission approval under section

12(b) and rule 45(a) for capital

contributions and open account

advances without interest to a

subsidiary company. As amended, the

exception of rule 45(b) is available if the

aggregate amount of such financing

transactions on behalf of a subsidiary

energy-related company conforms to the

limitations of rule 58. Rule 52(b) is

similarly amended to qualify the

exemption that the rule provides from

the requirement of prior Commission

approval under sections 6(a) and 7 for

securities issued by energy-related

subsidiary companies to associate

companies.

I. Introduction

This rulemaking arises in the broad

context of nonutility diversification by

registered gas and electric public-utility

holding companies. Section 9(a)(1) of

the Holding Company Act requires prior

Commission approval under the

standards of section 10 for a direct or

indirect acquisition by a registered

holding company of ‘‘any securities’’ or

‘‘any interest in any other business,’’

i.e., any nonutility interest.2 Section

10(c)(1) precludes approval of an

acquisition that would be ‘‘detrimental

to the carrying out of the provisions of

section 11.’’ Section 11, described in the

legislative history of the Act as the

‘‘very heart’’ of the Act,3 requires the

Commission to confine the nonutility

interests of such companies to those that

are ‘‘reasonably incidental, or

economically necessary or appropriate

to the operations of [an] integrated

public-utility system.’’ 4 The

Commission has interpreted the
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7901

5See generally Michigan Consolidated Gas Co., 44

S.E.C. 361, 363–66 (1970), aff’d, 444 F.2d 913 (D.C.

Cir. 1971) (rejecting proposed investment in low

income housing projects). See also CSW Credit, Inc.,

Holding Co. Act Release No. 25995 (Mar. 2, 1994)

(rejecting proposed expansion of transactions with

nonassociate companies by subsidiary engaged in

factoring of utility accounts receivable). By its

terms, section 11 applies only to registered holding

companies. The Commission has never determined

the limits on diversification by exempt holding

companies.

6Section 11 was intended ‘‘simply to provide a

mechanism to create conditions under which

effective Federal and State regulation will be

possible.’’ Senate Report at 11. As an historical

matter, the statute led to the refashioning of the

structure and the business practices of an entire

industry. See, e.g., Joel Seligman, The

Transformation of Wall Street: A History of the

Securities and Exchange Commission and Modern

Corporate Finance (rev. ed. 1995).

7See, e.g., Hope Gas, Inc., Holding Co. Act

Release No. 25739 (Jan. 26, 1993) and Georgia

Power Co., Holding Co. Act Release No. 25949 (Dec.

15, 1993) (securities of local venture capital

companies); Georgia Power Co., Holding Co. Act

Release No. 26220 (Jan. 24, 1995) and East Ohio Gas

Co., Holding Co. Act Release No. 25046 (Feb. 27,

1990) (securities of affordable housing

partnerships); Potomac Edison Co., Holding Co. Act

Release No. 25312 (May 14, 1991) (shares of forprofit economic development corporation).

8Under rule 40(a)(5), a holding company or

subsidiary may acquire up to $5 million annually

of the securities of economic development

companies created under special state laws

promoting economic development, and up to $1

million annually in local industrial or nonutility

enterprises.

9Michigan Consolidated Gas Co., 44 S.E.C. at 366.

10 60 FR at 33643.

11The Commission in some instances imposed

percentage, geographic or other limitations upon

transactions on behalf of nonassociate companies.

These limitations were intended to ensure that the

particular nonutility interest would continue to

benefit the integrated system primarily and thereby

conform to the functional relationship requirement.

12The Commission took a more flexible approach

to functional relationship in Southern Co., Holding

Co. Act Release No. 26211 (Dec. 30, 1994). In that

case, Southern proposed to develop a

communications system to provide services to both

system companies and nonassociates. While only a

small additional investment in the system was

required to facilitate nonassociate transactions, a

majority of the revenues from the system could

ultimately be derived from these transactions. The

Commission approved the proposal, stating that the

relative investment for associate and nonassociate

purposes is relevant to a determination of a

functional relationship. Alternatively, the

Commission found a functional relationship existed

because the nonutility interest being acquired (1)

would involve the sale or lease of products or skills

of some complexity developed by the holding

company at considerable expense for the benefit of

its utility subsidiaries and not readily available to

the rest of the public from other sources; (2) would

generally require little or no further investment by

the holding company; and (3) would permit the

amortization of product development expenses with

little or no risk (citing Jersey Central Power & Light

Co., Holding Co. Act Release No. 24348 (Mar. 18,

1987), as approved in CSW Credit, Inc., note 5

above).

13Under the Public Utility Regulatory Policies

Act of 1978 (‘‘PURPA’’), 16 U.S.C. 824a–3, and

related legislation, a registered holding company

can acquire an interest in ‘‘qualifying facilities’’

(‘‘QFs’’), as defined in the regulations under

PURPA, that are unrelated to its core utility

operations. See also the Energy Policy Act of 1992,

discussed below.

14 Pub. L. No. 101–572, 104 Stat. 2810 (Nov. 15,

1990), codified as a note to section 11 of the Act.

15 See, e.g., Columbia Gas System, Holding Co.

Act Release No. 25802 (Apr. 22, 1993) (authorizing

subsidiary to engage in marketing of natural gas).

Section 2(b) of the GRAA requires the Commission

to determine whether the proposed activities will

benefit both the retail and the wholesale utility

customers of the registered system.

provisions of section 11 to reflect a

Congressional policy against nonutility

activities that bear no operating or

functional relationship to the utility

operations of the registered system. 5

This interpretation was intended to

focus the attention of the registered

holding company on the needs of its

operating utilities, and thereby protect

consumers and investors against the

risks that might be associated with

unrelated businesses.6

Section 9(c)(3) of the Act provides an

exemption from the requirements of

section 9(a)(1) for the acquisition of

‘‘such commercial paper and other

securities, within such limitations as the

Commission may by rules and

regulations or order prescribe as

appropriate in the ordinary course of

business of a registered holding

company or subsidiary company thereof

and as not detrimental to the public

interest or the interest of investors or

consumers.’’ The Commission has

previously issued orders under section

9(c)(3) exempting from section 9(a)(1)

acquisitions of small amounts of

securities of local industrial

development corporations, affordable

housing projects, and venture capital

concerns, among others. 7 The

Commission has also adopted rule

40(a)(5) under section 9(c)(3) to exempt

such acquisitions from the requirements

of section 9(a)(1), provided that an

affiliate relationship does not result, and

subject to certain annual dollar

limitations. 8 The Commission has noted

that section 9(c)(3) may not be used to

circumvent section 11(b)(1)’s

prohibition of the acquisition of an

interest in a business unrelated to the

core utility business. 9

As noted in the Proposing Release, 10

registered holding companies have filed

numerous applications in recent years

seeking authorization to engage in

nonutility activities that the companies

contend complement, or are natural

extensions of, the evolving gas and

electric industries. In considering these

applications, the Commission has

attempted to balance the need for

regulatory change due to industry

developments with the need for

continued protection under the Act of

the public interest and the interest of

investors and consumers. 11 The concept

of a functional relationship has been

expanded in some cases, in a manner

consistent with the purposes and

limitations of the Act, and the

Commission has permitted some

activities that would benefit the

registered system in ways less tangible

and direct than those considered and

approved in orders of previous years. In

some cases the Commission approved as

part of this development extensive

transactions with nonassociate

companies and declined to limit the

transactions to the particular service

territory of the registered system

utilities. To this extent, the Commission

implicitly correlated the functional

relationship test with changes in the

industry. 12

Congress has enacted a number of

important legislative measures to

facilitate acquisitions by registered

holding companies of interests to which

section 11 was perceived to create

barriers. In some instances, the

legislation treated acquisitions of

essentially utility interests as nonutility

acquisitions for purposes of the Act, so

as to avoid the integration requirements

of section 11. 13 In other instances, the

legislation permitted essentially

nonutility activities that were either

closely related to core operations or

otherwise deemed appropriate for

participation by registered holding

companies. An example of recent

legislation relates to nonutility activities

involved in the supply of natural gas.

In 1990, Congress enacted the Gas

Related Activities Act to permit a gas

registered holding company to engage in

transportation, marketing, storage and

other nonutility gas-related activities

that are not functionally related to the

company’s business. 14 The GRAA

provides that an acquisition of an

interest in a company that engages in

certain gas-related activities, including

storage, transportation and wholesale

sales, is deemed to meet the

requirements of section 11(b)(1) of the

Act. The GRAA further provides that an

acquisition of an interest in a company

that engages in other activities relating

to the supply of natural gas is deemed

to meet the requirements of section

11(b)(1), if the Commission finds that

the acquisition is in the interest of

consumers of the holding company

system and is not detrimental to those

consumers or to the proper functioning

of the registered system. 15

In 1992, Congress acted to permit both

gas and electric registered holding

companies to acquire interests in

cogeneration and small power

production facilities, wherever located,
7902 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

16 Energy Policy Act, Pub. L. 102–486, 106 Stat.

2776 (1992). These activities of EWGs are limited

primarily to the sale of electric power for resale.

17 See Articles IV, V and VI, Energy Policy Act

of 1992, Pub. L. 102–486, 106 Stat. 2777 (1992)

(codified as a note to section 2). These legislative

developments are discussed at greater length in the

Proposing Release. 60 FR at 33644.

18 See generally The Regulation of Public-Utility

Holding Companies, Report of the Division of

Investment Management, Securities and Exchange

Commission (June 1995) (‘‘Report’’), at 19–22, 26–

27 (surveying recent regulatory and other

developments in the electric and gas industries).

Among other things, the Report notes that following

the Energy Policy Act, the FERC has engaged in a

series of initiatives to encourage the development

of competitive energy markets. Id. at 23. More

recently, on April 24, 1996, the FERC adopted

Order No. 888, FERC Stats. & Regs. ¿ 31,036, which

represents a major step in the effort to increase

competition in the generation and transmission

segments of the electric industry.

19 See, e.g., ‘‘State Regulators Debate Taking a

Stand on National Retail Wheeling Legislation’’,

Energy Report (March 4, 1996) (describing state

initiatives and possible support for federal

legislation establishing retail wheeling). At the state

level, for instance, New Hampshire has adopted a

pilot program under which each New Hampshire

utility must allow customers representing three

percent of peak load to have access to alternative

suppliers of electricity for two years, beginning on

or about May 28, 1996. Order of the New

Hampshire Public Utilities Commission on the

Retail Competition Pilot Program Establishing Final

Guidelines and Requiring Compliance Filings

(Order No. 22,033, dated Feb. 28, 1996). Other

states, such as Massachusetts, Rhode Island and

Illinois, are also implementing or considering

programs to promote retail competition.

20 The Commission has authorized registered

holding companies to engage, through nonutility

subsidiaries, in the retail marketing of electric

power in specific states that have implemented

plans and programs for competition in retail electric

markets, see, e.g., Eastern Utilities Assocs., Holding

Co. Act Release No. 26519 (May 23, 1996)

(authorizing retail sales of electric power pursuant

to pilot programs in New Hampshire and

Massachusetts) and, more recently, has authorized

retail marketing of both electric power and natural

gas on a nationwide basis, subject to compliance

with applicable state law. SEI Holdings, Inc.,

Holding Co. Act Release No. 26581 (Sept. 26, 1996).

21 The Commission acknowledged these

developments in the Proposing Release, 60 FR at

33643, and, again, in a recent order authorizing a

gas registered holding company to acquire an

interest in a partnership formed to engage in the

wholesale brokering and marketing of natural gas,

electricity and other fuels. Consolidated Natural

Gas Co., Holding Co. Act Release No. 26512 (Apr.

30, 1996). The order noted the growing competition

among various companies, including exempt

holding companies, as well as stand-alone utilities

and other companies not subject to the Act, to meet

increasing customer demand for a full range of

energy options.

22See, e.g., Consolidated Natural Gas Co.,

Holding Co. Act Release No. 26512 (approving

wholesale marketing and brokering of natural gas,

electricity and other fuels, without percentage

limitations); Eastern Utilities Assocs., Holding Co.

Act Release No. 26232 (removing percentage

limitation previously placed upon demand-side

management and energy management services

business of registered holding company); Southern

Co., Holding Co. Act Release No. 26211

(considering, in assessment of a functional

relationship, the relative investment for associate

and nonassociate companies).

23Report at 81–87, 91–92.

24Telecommunications Act of 1996, Pub. L. 104–

104, 110 Stat. 56 (1996) (‘‘Telecommunications

Act’’), codified as section 34 of the Act.

25The Telecommunications Act does not provide

that ETCs themselves are exempt from regulation

under the Act. See section 34. However, the law

contemplates that the role of the Commission will

consist largely of monitoring telecommunications

investments of registered holding companies. The

Commission is authorized to require reporting of

investments in, and activities of, ETCs that are

likely to have a material impact on the financial or

operational condition of a registered holding

company. See section 34(f).

26As noted in the Proposing Release, rule 58 is

intended largely to encompass investments in

companies engaged in activities of the same or

substantially similar character as those approved in

previous orders of the Commission under sections

9(a)(1) and 10. 60 FR at 33648.

and to market and broker electric power

through affiliated exempt wholesale

generators (‘‘EWGs’’). 16 In 1992,

Congress also enacted legislation to

promote the development of alternative

powered vehicles as a part of a national

energy policy to reduce automobile

emissions. The legislation permits gas

registered holding companies to engage

in activities related to vehicular natural

gas, as defined. 17

As a result of Congressional action,

combined with initiatives of the Federal

Energy Regulatory Commission

(‘‘FERC’’) and the state and local

ratemaking authorities, the pace of

change in the gas and electric utility

industry is accelerating. Today, the gas

industry is largely deregulated and the

electric industry is undergoing a similar

process. 18 In addition to increasing

competition at the wholesale level,

retail electric competition is developing

more rapidly than anticipated, due to

state efforts. 19 Utilities and other

suppliers of energy appear poised to

compete in retail markets. 20 As a result

of these developments, the

contemporary gas and electric industries

no longer focus solely upon the

traditional production and distribution

functions of a regulated utility, but are

instead evolving toward a broadly

based, competitive, energy services

business. 21

As discussed previously, the

Commission has sought to respond to

developments in the industry by

expanding its concept of a functional

relationship in a manner consistent with

the purposes and limitations of the Act.

In several recent filings, the

Commission has been requested to

reconsider some administrative

restrictions employed in the past. In

approving these requests, the

Commission determined, as required by

the Act, that its action would not be

detrimental to the interests protected

under the Act. The Commission

suggested that various considerations,

including developments in the industry,

the Commission’s familiarity with the

particular nonutility activities at issue,

the absence of significant risks inherent

in the particular venture, the specific

protections provided for consumers and

the absence of objections by the relevant

state regulators, made it unnecessary to

adhere rigidly to the types of

administrative measures discussed

above.22 Further, a 1995 Commission

staff report recommended that the

Commission replace the use of brightline limitations with a more flexible

standard that would take into account

the risks inherent in the particular

venture and the specific protections

provided for consumers.23

Finally, after the issuance of the

Proposing Release, Congress enacted

legislation amending the Act to permit

registered holding companies, without

prior Commission approval under

sections 9(a)(1) and 10, to participate in

a broad range of telecommunications

activities through a special purpose

subsidiary, an ‘‘exempt

telecommunications company’’

(‘‘ETC’’).24 Once an entity is certified as

an ETC by the Federal Communications

Commission, acquisition and retention

by a registered holding company of an

interest in the entity is exempt from

substantive requirements under the

Holding Company Act.25 As a result of

this legislation, the provisions of

proposed rule 58 concerning

telecommunications activities are no

longer needed.

The Commission believes that the

realities of the contemporary gas and

electric industries, and its experience in

the administration of sections 9 and 10

of the Act, permit a recognition that

certain activities are an integral part of

the contemporary utility business, and

so may be deemed to be activities ‘‘in

the ordinary course of business’’ of a

registered holding company within the

meaning of section 9(c)(3) of the Act.

Rule 58 identifies such activities. The

rule is variously subject to qualifications

and limitations that are intended to

ensure that acquisitions pursuant to the

rule are appropriate in the ordinary

course of business, as contemplated by

section 9(c)(3), are consistent with prior

orders under section 9(a)(1) and 10, and

are not detrimental to the protected

interests.26

II. Proposed Rule 58

Rule 58 is intended to facilitate

investments by registered holding

companies in energy-related and gasrelated companies. Acquisitions

pursuant to the rule are considered to be
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7903

27The registered holding companies that

submitted comments are Allegheny Power System,

Inc. (‘‘Allegheny’’), American Electric Power

Company, Inc. (‘‘AEP’’), Central and South West

Corporation (‘‘CSW’’), Cinergy Corp. (‘‘Cinergy’’),

The Columbia Gas System, Inc. (‘‘Columbia’’),

Consolidated Natural Gas Company

(‘‘Consolidated’’), Eastern Utilities Associates

(‘‘EUA’’), Entergy Corporation (‘‘Entergy’’), General

Public Utilities Corporation (‘‘GPU’’), Northeast

Utilities (‘‘Northeast’’) and The Southern Company

(‘‘Southern’’). The exempt holding company that

submitted comments is Wisconsin Energy

Corporation (‘‘Wisconsin Energy’’), and the industry

association is the American Gas Association

(‘‘AGA’’). The local regulator that submitted

comments is the Council of the City of New

Orleans. Copies of the comments are available for

inspection in File No. S7–12–95 in the

Commission’s public reference room.

28See, e.g., Comments of AEP (the rule would

reduce regulatory burdens on registered systems

and permit them to compete in the energy

industry); and Columbia (the rule eliminates

unnecessary and costly regulatory burdens on

registered systems). Some commenters also note

that, beyond adoption of rule 58, the Commission

should provide registered holding companies with

the flexibility to engage in utility-related businesses

without limitation. See, e.g., Comments of AGA

(section 11 should be broadly interpreted to permit

gas systems to enter into any business involving

production, transmission, dissemination or

marketing of any form of consumable energy or any

business or operation based on the facilities,

resources or expertise from the company’s

operations); and CSW (restrictions on

diversification prevent registered systems from

engaging in businesses that would benefit

customers and investors and impede efficient

evolution of the electric utility industry).

29For example, one commenter notes that the rule

should generally be more flexible, so as to

accommodate changes that may arise as the

restructuring of the electric industry continues.

Comments of Wisconsin Energy. The Commission

notes, however, that various issues, such as those

that surround the possible disaggregation of utility

assets and horizontal integration of utility

functions, are beyond the scope of a rule that is

intended to exempt nonutility interests that are

commonplace today and closely related to the core

utility business. The Commission continues to

examine the issues raised by industry restructuring,

and will undertake any necessary or appropriate

rulemaking or other administrative action in the

future.

30New Orleans opposes the rule on many

grounds. Among other things, New Orleans asserts

that the rule constitutes ‘‘deregulation of nonutility

investment by registered holding companies [that]

is unlawful and not in the public interest.’’ It

further asserts that the rule does not adequately

protect consumers from ‘‘diversification risks and

failures which are well known and documented in

this industry.’’ New Orleans states that only the

Commission has the authority to regulate

diversification and that it has a ‘‘duty to protect

consumers’’ in this area. Comments of New Orleans

at 3–4.

31Comments of AGA, Columbia and

Consolidated. Suggested definitions would include

any company engaged in a business based on or

developed from the facilities, resources, technology

or expertise of the registered system’s operations

(Comments of AGA and Columbia); and any

company engaged in a business involving the

production, transmission, dissemination or

marketing of any form of consumable energy

(Comments of AGA).

‘‘appropriate in the ordinary course of

business’’ within the meaning of section

9(c)(3), and are thus exempt from the

requirement of prior Commission

approval under sections 9(a)(1) and 10.

The Commission received comment

letters from, or on behalf of, eleven

registered holding companies, one

exempt holding company, one industry

trade association, and one local

regulatory authority.27 With the

exception of the Council of the City of

New Orleans (‘‘New Orleans’’), all

commenters support adoption of the

rule 28 and, in many cases, propose

additional changes to expand the rule.29

New Orleans opposes adoption of the

rule,30 and requests, in the alternative,

a more restrictive rule. The comments

received on various aspects of the rule

are discussed below. The Commission is

adopting rule 58 and the conforming

amendments to rules 45 and 52

substantially as proposed, but with a

number of clarifications.

A. Investments in Energy-Related

Companies

Rule 58(a)(1) exempts from the

requirement of prior Commission

approval under sections 9(a)(1) and 10,

pursuant to section 9(c)(3), the

acquisition by a registered holding

company or its subsidiary company of

securities of an ‘‘energy-related

company;’’ provided, that aggregate

investment (as defined) in such

companies does not exceed the greater

of 15% of consolidated capitalization or

$50 million. Investments made prior to

effectiveness of the rule are excluded for

purposes of calculating the investment

limitations.

The Proposing Release defines an

‘‘energy-related company’’ in terms of

the activities in which it may engage.

Specifically, as proposed, the rule

would define an energy-related

company as one that engages in: (1) One

or more of various categories of specific

activities set forth in the rule, described

below, and (2) such other nonutility

activities as the Commission may from

time to time approve by order upon

application under sections 9 and 10,

and, so doing, designate as energyrelated for purposes of the rule. Rule 58

requires that an energy-related company

at all times derive substantially all of its

revenues from the activities designated

in the rule.

The energy-related activities specified

in subsection (b)(1) of the rule as

proposed were:

(1) The rendering of energy conservation

and demand-side management services;

(2) The development and

commercialization of electrotechnologies

related to energy conservation, storage and

conversion, energy efficiency, waste

treatment, greenhouse gas reduction, and

similar innovations;

(3) The manufacture, conversion, sale and

servicing of electric and compressed natural

gas powered vehicles and ownership and

operation of related refueling and recharging

equipment;

(4) The sale, installation, and servicing of

electric and gas appliances for residential,

commercial and industrial heating and

lighting;

(5) The brokering and marketing of energy

commodities, including but not limited to

electricity or natural or manufactured gas;

(6) The production, conversion, and

distribution of thermal energy products, such

as process steam, heat, hot water, chilled

water, air conditioning, compressed air and

similar products; alternative fuels; and

renewable energy resources;

(7) The sale of technical, operational,

management, and other similar kinds of

services and expertise, developed in the

course of utility operations in such areas as

power plant and transmission system

engineering, development, design and

rehabilitation; construction; maintenance and

operation; fuel procurement, delivery and

management; environmental licensing,

testing and remediation; and other similar

areas;

(8) The ownership or operation of QFs, and

facilities necessary or incidental thereto,

including thermal energy utilization facilities

purchased or constructed primarily to enable

the qualifying facility to satisfy the useful

thermal output requirements under PURPA;

(9) The ownership or operation of fuel

procurement, transportation, handling and

storage facilities, scrubbers, and resource

recovery and waste water treatment facilities;

(10) The production, transportation,

distribution or storage of all forms of energy

other than electricity and natural or

manufactured gas;

(11) The development and

commercialization of technologies or

processes that utilize coal waste by-products

as an integral component of such technology

or process; and

(12) The ownership, sale, leasing or

licensing of the use of telecommunications

facilities and equipment (such as fiber optic

lines, coaxial cable, or other communications

capacity, towers and tower sites and other

similar properties).

The rule as proposed also specifically

provided a means for the Commission to

add additional activities to the

definition upon application in the

future.

1. Definition of ‘‘Energy-Related

Company’’

a. General. The Commission received

a substantial number of comments

concerning the definition of ‘‘energyrelated company.’’ Several commenters

assert that the definition should not

consist of enumerated categories of

specific activities, but should instead be

broad and general.31 Although this

approach would offer greater flexibility,
7904 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

32As discussed above, the Commission has

interpreted the provisions of section 11 of the Act,

referenced in section 10(c)(1), to reflect a

Congressional policy against nonutility activities

that bear no operating or functional relationship to

the utility operations of the registered system. See

generally Michigan Consolidated Gas Co., 44 SEC

361 at 363–65.

33The Commission has determined that a

transaction need not satisfy the standards of section

11(b)(1) in order to qualify for exemption under

section 9(c)(3), but that section 9(c)(3) may not be

used to circumvent the requirements of section

11(b)(1) generally. Id. at 366 (‘‘Section 9(c)(3)

cannot be employed to evade the proscription of

section 11(b)(1) prohibiting the acquisition by a gas

utility company of an interest in a business

unrelated to its business’’); but see id. at 369 (‘‘the

majority unduly constricts the scope of the section

9(c)(3) exemption when it holds that to be entitled

to such exemption a transaction must also meet the

standards of section 11(b)(1)’’) (Commissioner

Owens, concurring in part and dissenting in part)

and 370 (Commissioner Smith, dissenting).

34Comments of CSW.

35As noted previously, the Commission has

found that section 9(c)(3), under which rule 58 is

adopted, may not be used to circumvent the

requirements of section 11(b)(1) of the Act.

36This mechanism was provided in subsection

(b)(1)(xiii) of the proposed rule.

37See e.g., the relevant provisions of the

Administrative Procedure Act, 5 U.S.C. 553, and the

Commission’s rules of practice, 17 CFR 201.192.

38A similar provision in the definition of ‘‘gasrelated company’’ has also been eliminated.

39Comments of GPU.

40The provisions of the Act that permit use of

intermediate holding companies in connection with

investment in exempt wholesale generators reflect

the same concept. See section 32(a)(1).

the Commission believes that it is not

consistent with the requirements of

section 9(c)(3) of the Act. As discussed

previously, that section provides an

exemption only for acquisitions of

securities that are made in the ordinary

course of business of the registered

system and that are not detrimental to

the protected interests. Rule 58 is

intended to encompass activities with

which the Commission is familiar as a

result of its administrative experience

and that appear to be so closely related

to the ordinary course of the

contemporary utility business as not to

require case-by-case analysis pursuant

to sections 9(a)(1) and 10. For this

reason, the Commission is retaining

enumerated categories in the rule as

adopted.

Similarly, the Commission notes that

the enumerated categories of specific

energy-related activities in rule 58 are

exhaustive, rather than illustrative. In

order for a direct or indirect acquisition

of securities by a registered holding

company or its subsidiary to qualify for

the exemption provided by the rule, the

company in which the interest is

acquired must be engaged almost

exclusively in the type of activities

specified in the rule. A registered

holding company will continue to apply

to the Commission for prior approval of

any acquisitions concerning activities

that fall outside the categories identified

by the rule as energy-related. Further, as

discussed below, to the extent that a

company engages in activities in

addition to those permitted under rule

58, an application will also be required.

New Orleans suggests that the

definition should include a requirement

that the permitted activity be

functionally related to the system’s

utility business under sections 10 and

11.32 Such a requirement is unnecessary

for several reasons. First, a finding of a

functional relationship is not required

in order to qualify for an exemption

under section 9(c)(3).33 Moreover, even

though a finding of a functional

relationship under section 11(b)(1) is

not required in this context, each of the

activities permitted under the rule as

adopted has in many instances been

found, by order upon application under

sections 9(a)(1) and 10, to satisfy the

statutory requirements, including those

of section 11(b)(1).

One commenter objects to the

requirement that an energy-related

company derive ‘‘substantially all’’ of its

revenues from activities designated as

‘‘energy-related,’’ and suggests that the

rule should instead require that a

company derive merely a stated portion,

e.g., at least 30%, from such activities.34

The Commission notes, however, that

this measure would permit registered

holding companies to make sizeable

investments in companies engaged

primarily in novel, unspecified

nonutility businesses. The Commission

believes its authority to create such a

broad exemption by rule under section

9(c)(3) is subject to question.35 The

Commission declines, therefore, to

adopt this suggestion. Any acquisition

of an interest in a nonutility business

that does not derive substantially all of

its revenues from one or more of the

activities set forth in the categories of

the rule will continue to require prior

Commission approval by order upon

application.

New Orleans objects to the proposed

provision of the rule creating a

procedure for designating additional

activities to be energy-related by order

upon application under section 10.36

New Orleans asserts that new activities

and investments should be approved

only pursuant to rulemaking, so that all

parties have an opportunity to evaluate

and comment upon the relationship of

the new activity to the core utility

business and the potential effects on

ratepayers.

In proposing this mechanism for

updating the rule, the Commission

intended that all procedural

requirements applicable to agency

rulemaking would be observed in

connection with the proposed

designation by order of additional

activities as energy-related for purposes

of rule 58, including in particular the

requirements related to public notice

and opportunity to comment.37 On

reconsideration, however, the

Commission has determined that this

provision could result in increased

administrative burdens for both the

registered holding companies seeking

approval of new activities and the

Commission staff.

If rulemaking is undertaken in the

context of consideration of an

application for approval of a specific

nonutility investment, adherence to

required procedures, including an

extended comment period for the

rulemaking and consideration of all

views submitted, could delay approval

of the proposed transaction that is the

subject of the application. Further,

repetitive paperwork in connection with

the rulemaking aspects of each such

application could consume extensive

staff resources. Accordingly, this feature

of proposed rule 58 has not been

retained.38 The Commission believes,

however, that future expansion of the

scope of the rule, to reflect additional

nonutility activities found by the

Commission to satisfy the standards of

the Act, is essential to achieve the rule’s

intended flexibility. The Commission

intends to evaluate periodically the

coverage of the rule in light of existing

Commission orders under sections 9

and 10 of the Act, and initiate

rulemaking proceedings to reflect any

appropriate changes.

One commenter suggests that the

definition of energy-related company be

expanded to include companies that

derive substantially all of their revenues

from the listed activities, either directly

or indirectly.39 The requested revision

would permit a registered holding

company system to use one or more

intermediate subsidiaries (i.e., ‘‘project

parents’’) to invest in energy-related

companies, yet retain the benefit of the

exemption afforded by the rule.40 The

Commission believes that this

suggestion is consistent with the intent

of the rule as proposed. Use of an

intermediate subsidiary could further

insulate the holding company and its

other subsidiaries, including utility

subsidiaries, from any direct losses that

could occur with respect to rule 58

investments. At the same time, this

measure would offer greater flexibility

in the structuring of these investments.
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7905

41This concept is also reflected in the definition

of a gas-related company.

42Comments of Northeast.

43Comments of CSW.

44Holding company systems engaged in both the

electric and gas utility business will be considered,

for purposes of the rule, to be engaged only in one

type of utility business, as determined by the type

of operations that constitute the holding company’s

primary utility business.

45For example, an electric registered holding

company system would be required to file an

application and obtain authorization to acquire an

interest in a company engaged in ownership and

operation of refueling equipment for natural gaspowered vehicles. While acquisition of an interest

in such a company could be exempt under rule 58

for a gas registered holding company system, it is

not in the case of an electric registered holding

company.

46No comments were received on this subsection.

47See, e.g., Eastern Utilities Assocs., Holding Co.

Act Release No. 26232 (Feb. 15, 1995); and

Northeast Utilities, Holding Co. Act Release No.

25114–A (July 27, 1990).

48See, e.g., New England Electric System, Holding

Co. Act Release No. 22719 (Nov. 19, 1982).

49This subsection is intended to encompass all

consumer-oriented activities that represent

components of a holding company system’s

demand-side management and integrated-resource

planning functions, or that are intended to reduce

customer energy costs or lead to efficient use of

energy resources by affecting energy consumption.

Customer financing is not encompassed by this

subsection.

50No comments were received on this category of

activities.

51See, e.g., American Electric Power Co., Holding

Co. Act Release No. 25424 (Dec. 11, 1991)

(acquisition of an interest in a company that

develops, manufactures and markets efficient light

bulbs); and Allegheny Power System, Inc., Holding

Co. Act Release No. 26085 (July 14, 1994)

(investments in technologies related to power

conservation and storage, conservation and load

management, environmental and waste treatment,

and power-related electronic systems and

components).

Accordingly, the rule, as adopted, is

modified to incorporate the concept of

indirect investment in energy-related

companies through project parents.41

The Commission notes, however, that

any such intermediate subsidiary, like

the underlying energy-related

companies, must derive ‘‘substantially

all’’ of its revenues from the permitted

activities. If the company will engage in

other activities, directly or indirectly,

prior Commission approval of an

investment interest in such company

will be required.

b. Categories of energy-related

activities. The Proposing Release invited

specific comment on whether the

proposed rule should include additional

kinds or categories of energy-related

activities. One commenter suggests that

customer financing for other energyrelated activities should be a separate

category of permitted activity for an

energy-related company.42 The

Commission notes that customer

financing has been approved in a

number of cases involving activities that

are designated as energy-related under

rule 58, and agrees that it may be an

appropriate activity for some energyrelated companies. However, this type

of activity is better addressed in the

context of rule 48, as discussed below.

The Commission therefore declines to

include customer financing as an

energy-related activity under rule 58.

Another commenter suggests that any

nonutility business in which the

applicable state commission would

allow a regulated utility or exempt

holding company to engage or invest

should be a permitted activity for

energy-related companies.43 That a state

commission permits utilities or holding

companies that are subject to its

jurisdiction to engage in a given

nonutility activity can be a strong

indication that the activity is

appropriate, and, in a given case, it may

be persuasive evidence that some of the

standards of the Act have been satisfied.

However, that a state commission has

approved a type of investment does not

necessarily mean that it is in the

ordinary course of business of a

registered holding company or its

subsidiary for purposes of section

9(c)(3). The Commission does not

believe that rule 58 should incorporate

such state determinations as a general

matter, without any indication as to the

nature of the approved activities or the

relevant state law standards. Thus, the

Commission will continue to review any

such activity on a case-by-case basis,

giving due consideration to the views of

state regulators toward the activity in

question.

As proposed, the rule did not indicate

clearly whether an interest in an energyrelated company engaging in an

enumerated activity could be acquired

pursuant to the rule by companies in

electric holding company systems, gas

holding company systems, or both. As

adopted, rule 58(b)(1) has been clarified

in this regard to limit the exemption

solely to those activities that are

considered to be in the ordinary course

of the type of utility business in which

a particular holding company system is

engaged.44 Any proposal by a registered

holding company system to acquire an

interest in a company engaged in

nonutility activities of a type not

exempt under the rule for that type of

registered system may be the subject of

an application for Commission approval

under sections 9(a) and 10.45

Many commenters suggest specific

changes or additions to the categories of

permitted activities set forth in the

definition. A number of comments

request clarifications and propose

additions to the list of activities

permitted for an energy related

company. Some, but not all, comments

and revisions to the categories of

permitted activities are discussed

below.

(1)Subsection (b)(1)(i): Energy and

demand-side management services. This

category of activities was defined in the

Proposing Release to include the

rendering of energy conservation and

demand-side management services.46

The Commission has previously

considered and approved by order

under sections 9(a)(1) and 10 a broad

range of activities relating to the

business of energy management and

demand-side management, including

the following: Energy audits; facility

design and process enhancements;

construction, maintenance and

installation of, and training client

personnel to operate, energy

conservation equipment; design,

implementation, monitoring and

evaluation of energy conservation

programs; development and review of

architectural, structural and engineering

drawings for energy efficiencies; design

and specification of energy consuming

equipment; and general advice on

programs.47 Upon additional

consideration, the Commission has

concluded that ‘‘energy conservation

services’’ may not be broad enough to

cover the types of activities intended to

be exempted under this category. The

term ‘‘energy management services’’

more accurately reflects the scope of the

exempted activity.48 The rule as adopted

is revised accordingly. Apart from this

clarification, the subsection is adopted

as proposed.49

Companies in both electric and gas

registered systems may acquire interests

in companies engaging in the activities

specified in this subsection.

(2) Subsection (b)(1)(ii): development

and commercialization of

electrotechnologies.

As used in the rule,

electrotechnologies relate to energy

conservation, storage and conversion,

energy efficiency, waste treatment,

greenhouse gas reduction and similar

innovations.50 The Commission has, on

many occasions, approved investments

by electric registered system companies

in technologies related to the electric

utility business.51 Because the

Commission has not yet considered

proposals by registered gas system

companies to engage in activities related

to such technologies, the Commission is

not prepared at this time to deem these

activities to be appropriate in the

ordinary course of the utility business of

such systems. Accordingly, the

Commission is revising the rule to
7906 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

52No comments were received on this subsection.

53The Commission has issued orders authorizing

broader involvement with respect to such activities

than that reflected in the rule as proposed. See, e.g.,

Columbia Gas System, Holding Co. Act Release No.

26295 (May 23, 1995) (authorizing the sale,

ownership, operation, installation and servicing of

natural gas refueling equipment and sale of

equipment and facilities for use in vehicle

conversion); and Consolidated Natural Gas Co.,

Holding Co. Act Release No. 25615 (Aug. 27, 1992)

(same).

54The Commission has not yet approved these

types of activities by order under sections 9(a) and

10.

55Comments of Consolidated and Northeast.

Because the term ‘‘sale,’’ as defined in section

2(a)(23) of the Act, encompasses dispositions by

lease, the Commission believes that no change to

the subsection is needed.

56Comments of Northeast. Northeast also raised

the question of customer financing in a broader

context, suggesting the addition to the rule of a

category concerning the financing of other energyrelated activities. The Commission has determined

to address this issue in the context of rule 48, as

discussed below.

57Comments of CSW.

58Comments of Northeast.

59Prior orders in this area under sections 9(a)(1)

and 10 permit the sale, installation, servicing and/

or financing of significantly broader categories of

equipment than appliances for heating and lighting.

See, e.g., Consolidated Natural Gas Co., Holding Co.

Act Release No. 26234 (Feb. 23, 1995).

60See e.g., Cities Service Co., 15 S.E.C. 962 (1944);

General Public Utilities Corp., Holding Co. Act

Release No. 15184 (Feb. 9, 1965); and Louisiana

Power & Light Co., Holding Co. Act Release No.

25445 (Dec. 26, 1991).

61Comments of Consolidated.

62Other combustible fuels would include, for

example, coal, oil, wood chips, oil shale, isobutane

and propane.

63See, e.g., Consolidated Natural Gas Co.,

Holding Co. Act Release No. 26512 (Apr. 30, 1996)

(approving wholesale marketing of energy

commodities, but reserving jurisdiction over retail

marketing activities until such time as state

programs permitting such activities are

implemented).

64See, e.g., Eastern Utilities Assocs., Holding Co.

Act Release No. 26519 (May 23, 1996) (participation

in retail electric pilot programs in New Hampshire

and Massachusetts); and New England Electric

System, Holding Co. Act Release No. 26520 (May

23, 1996) (same).

65SEI Holdings, Inc., Holding Co. Act Release No.

26581 (Sept. 26, 1996). The Commission noted that

industry trends and competitive pressures make it

important for registered system companies to be

poised to compete in new markets as they are

created, and that such participation appears to

promote the goals of U.S. energy policy, including

increased competition and lower utility rates.

66Consolidated Natural Gas Co., Holding Co. Act

Release No. 26512 (Apr. 30, 1996); UNITIL Corp.,

Holding Co. Act Release No. 26527 (May 31, 1996);

and SEI Holdings, Inc., Holding Co. Act Release No.

26581 (Sept. 26, 1996). Other companies in both

electric and gas holding company systems are also

seeking similar authorizations. See, e.g., National

Fuel Resources, Inc., File No. 70–8651.

clarify that only electric registered

holding companies and their

subsidiaries are permitted to acquire

companies that engage in the activities

in this subsection. The subsection is

otherwise adopted as proposed.

(3) Subsection (b)(1)(iii): electric and

gas vehicles. As proposed, this

subsection included manufacture,

conversion, sale and servicing of electric

and compressed natural gas powered

vehicles, and ownership and operation

of related refueling and recharging

equipment.52 The Commission has

determined that the subsection should

be expanded to include ownership,

operation, sale, installation and

servicing of refueling, recharging and

conversion equipment and facilities

relating to electric- and gas-powered

vehicles,53 but should not extend to

manufacture of such equipment and

facilities or to manufacture, conversion

and sale of the vehicles themselves.54

The Commission has revised the

subsection as adopted to make clear its

intended scope.

In addition, the Commission believes,

based on existing precedent, that it is

appropriate to limit the described

activities to those appropriate for gas

registered system companies and

electric registered system companies,

respectively. The rule as adopted is

revised to reflect this limitation.

(4) Subsection (b)(1)(iv): appliance

sales. As proposed, this subsection

included the sale, installation and

servicing of electric and gas appliances

for residential, commercial and

industrial heating and lighting.

Comments included suggestions that

this category extend to leasing 55 and

customer financing arrangements; 56 and

that the equipment at issue include

other energy-consuming devices 57 and

equipment used for energy generation,

both within and outside the system’s

service territory.58

The Commission finds that it is

appropriate to expand the types of

equipment addressed by the rule to

include other types of energyconsuming devices.59 Historically, the

Commission approved the activities

addressed in this subsection to

encourage consumption of electricity

and gas, to promote competition among

fuels and, more recently, to further

energy conservation.60 The rule as

adopted has been revised, consistent

with these precedents, to include

electric and gas appliances, equipment

that promotes technologies that use gas

or electricity and equipment that

enables use of gas or electricity as an

alternate fuel. Companies in both

electric and gas holding company

systems may acquire interests in

companies engaging in the activities

specified in this subsection.

The Commission declines to adopt the

suggestion that the rule exempt sale,

installation and servicing of generation

equipment. These activities may involve

issues of broader concern, which lie

outside the ambit of this rulemaking.

(5) Subsection (b)(1)(v): brokering and

marketing of energy commodities.

This subsection covers the brokering

and marketing of energy commodities,

including but not limited to electricity

and natural or manufactured gas. One

commenter proposes that this

subsection should be expanded to cover

energy-related commodities and should

specify that it covers other combustible

fuels in addition to electricity and gas.61

The Commission does not believe there

is a basis to include ‘‘energy-related

commodities’’ in this context. However,

the subsection is revised in the adopted

rule to include other combustible

fuels.62

As proposed, this subsection did not

indicate the markets in which the

permitted activities could be carried

out. The Commission’s existing orders

in this area extend primarily to

wholesale markets.63 However, the

Commission has authorized retail

electric marketing activities in states

with established retail wheeling

programs,64 and, more recently,

authorized retail marketing activities

with respect to both electric power and

natural gas, throughout the United

States, subject to compliance with

applicable state statutes, regulations and

orders with respect to such sales.65 In

view of these precedents, and in light of

the rapid development of competition in

retail markets, as discussed above, this

subsection is intended to cover

activities in both wholesale and retail

markets that are in compliance with

applicable law.

This subsection, as proposed, also did

not indicate whether a registered

holding company could acquire an

interest in a company dealing in all

energy commodities or only in electric

power or natural gas, as appropriate. At

the time the Proposing Release was

issued, the Commission’s previous

orders had, for the most part, limited

participation in gas marketing and

brokering activities to gas holding

company systems, and electric

marketing and brokering activities to

electric holding company systems.

Since that time, however, the

Commission has considered and

approved several proposals by

registered holding companies to engage

in the brokering and marketing of

energy commodities, including but not

limited to electricity and natural or

manufactured gas.66 The rule as adopted

permits companies in both electric and

gas systems to acquire interests in
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7907

67Comments of CSW. Unregulated activities are

stated to be those that are for the benefit of

shareholders.

68Comments of CSW.

69Comments of Cinergy.

70See, e.g., SEI Holdings, Inc., Holding Co. Act

Release No. 26581 (Sept. 26, 1996); Consolidated

Natural Gas Co., Holding Co. Act Release No. 25926

(Nov. 16, 1993); and Consolidated Natural Gas Co.,

Holding Co. Act Release No. 26512.

71Examples given in the rule include process

steam, heat, hot water, chilled water, air

conditioning, compressed air and similar products.

72Comments of GPU.

73Examples cited in the proposed rule include

power plant and transmission system engineering,

development, design and rehabilitation;

construction; maintenance and operation; fuel

procurement, delivery and management;

environmental licensing, testing and remediation;

and other similar areas. The activities contemplated

by the rule do not extend to any that would render

a company a public-utility company under the Act.

See section 2(a)(3), (4) and (5).

74Comments of Consolidated.

75Comments of AGA and Columbia.

76Comments of CSW.

77Comments of Northeast.

78Comments of Consolidated (gas exploration,

development, transmission or storage system

design); CSW (waste management activities); GPU

(consulting and training); Cinergy (revenue security

and employee safety); and Northeast (distribution

system engineering, development design and

rehabilitation, environmental services, and

transportation and fleet services).

79For instance, expertise in billing and customer

service may be developed in the course of utility

operations. These types of activities are not,

however, uniquely utility-related and, thus, are not

encompassed by this subsection.

80Section 13 prohibits registered holding

companies from entering into or performing any

contract for service, construction or the sale of

goods with any associate utility or service company,

except as may be permitted by rule in special

circumstances or in the ordinary course of business.

Section 13 also provides that subsidiaries of

registered holding companies, in entering into or

performing any such contracts, must comply with

any limitations imposed by the Commission as

necessary or appropriate to insure that such

contracts are performed economically and

efficiently for the benefit of such associate

companies at cost, fairly and equitably allocated

Continued

companies engaging in the activities

described in this subsection.

One commenter recommends that the

Commission revise the subsection to

clarify that it concerns both regulated

and unregulated activities.67 Since rule

58 addresses only the acquisition of

securities of nonutility companies

engaged in specified activities, this

comment is not reflected in the rule.

Several commenters suggest that the

specified activities should include ‘‘risk

management activities’’ 68 and ‘‘market

hedging tools.’’ 69 The Commission has,

in several instances, considered such

activities in connection with the

brokering and marketing of energy

commodities. 70 In each case, the order

was conditioned on representations that

hedging tools would be used only to

minimize risks associated with contracts

for purchase or sale of energy

commodities and would not be used to

engage in speculation. Such activities

are a means of limiting the risks

associated with marketing of energy

commodities and, subject to compliance

with the limitations noted above, may

be engaged in as part of the activities

covered by this subsection.

(6) Subsection (b)(1)(vi): Thermal

energy products. This subsection

addresses the production, conversion

and distribution of thermal energy

products,71 alternative fuels and

renewable energy resources. The

Commission received one comment,

suggesting that sale of such products

and servicing of thermal energy

facilities should be added to the

permitted activities.72 The rule as

adopted has been revised to include

these suggestions. The rule has also

been revised to limit availability of this

subsection to electric registered holding

company systems.

(7) Subsection (b)(1)(vii): sale of

services and expertise. This section

addresses the sale of technical,

operational, management and other

kinds of services and expertise

developed in the course of utility

operations.73 Commenters offer various

requests for expansion of this category.

One registered holding company

suggests that the category should also

include development, production,

marketing and financing of such

services and expertise.74 The

Commission notes, however, that the

subsection is intended to address

services and expertise that exist as a

result of system utility operations. The

development and production of such

services and expertise, solely for the

purpose of sale, are outside its scope. In

addition, the marketing of such services

and expertise is implicit in the concept

of sale, and thus need not be specifically

mentioned. As discussed below, the

Commission believes that customer

financing is better addressed in the

context of rule 48. The Commission

declines to adopt these proposed

revisions to the rule.

Two commenters suggest that

expertise and services developed in the

course of nonutility operations should

also be included.75 While expertise

related to some nonutility services may

be appropriate for inclusion in the

activities covered by the rule, the

Commission believes that there is not

yet an adequate basis for including

them, and will continue to consider

proposals on a case-by-case basis.

A registered holding company

suggests an expansion of this category to

include the sale of excess goods and

assets.76 The Commission declines to

adopt this suggestion with respect to

sale of utility assets and resources by a

nonutility company, primarily because

those activities could involve significant

consumer protection issues, and could

also raise restructuring issues that are

beyond the scope of the rule. Some sales

of excess nonutility assets and resources

may be a legitimate activity for rule 58

companies, but the Commission does

not believe that there is, as yet, an

adequate basis for inclusion of such

activities in the rule. Consideration of

these types of activities will continue to

be done on a case-by-case basis.

Another registered holding company

proposes that this category of the rule be

expanded to include the sale of

administrative services and equipment

related to services and expertise.77 The

Commission notes, however, that

administrative services, to the extent

they are within the scope of

management services, need not be

expressly addressed. In addition, as

discussed above, sales by a nonutility

subsidiary company of equipment used

in utility operations, even equipment

related to the service being sold, could

raise consumer protection issues.

Accordingly, the Commission declines

to accept these suggestions.

Commenters also suggest that the list

of examples of the types of services and

expertise covered by this subsection be

expanded.78 As discussed previously,

the rule is intended to encompass the

types of activities that may be

considered to be in the ordinary course

of business of a registered holding

company. In this regard, the

Commission has taken into account its

experience in administering sections

9(a)(1) and 10 of the Act. To the extent

that the commenters request the

inclusion of activities with which the

Commission has little or no familiarity,

it is appropriate to continue case-bycase review. Accordingly, the

Commission declines to modify the

adopted rule as these commenters

request.

It should also be noted in this regard

that only those type of services and

expertise that are uniquely utilityrelated are intended to fall within this

category of activity. Activities that are

more generic are not intended to be a

permitted activity for energy-related

companies.79

The Commission notes in connection

with this subsection that any use by a

system nonutility company of personnel

or other resources of an associate

public-utility company raises issues

under section 13 of the Act and rules

thereunder 80 relating to pricing of
7908 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

among such companies. Rules 85 through 92,

adopted under section 13, specify the situations in

which such transactions are permitted and

generally provide that, with some exceptions, such

contracts must be performed at cost.

81Such facilities are stated to include thermal

energy utilization facilities purchased or

constructed primarily to enable the QF to satisfy the

useful thermal output requirements under PURPA

and regulations thereunder.

82Comments of GPU.

83See, e.g., Southern Co., Holding Co. Act Release

No. 26212 (Dec. 30, 1994); and Allegheny Power

System, Inc., Holding Co. Act Release No. 26229

(Feb. 3, 1995).

84The Commission has authorized registered

holding companies to invest in an 18 acre thermal

host greenhouse, Central and South West Corp.,

Holding Co. Act Release No. 25399 (Nov. 1, 1991),

and an integrated carbon dioxide plant steam host,

Central and South West Corp., Holding Co. Act

Release Nos. 25477 (Feb. 18, 1992) and 25983 (Jan.

31, 1994). In each instance, the Commission found

that the incidental facility was necessary to the

operation of the QF. The Commission believes that

it is appropriate for the subsection of the rule to

extend to investments in any type of incidental

facility that is needed for a facility to attain QF

status.

85This subsection is not intended to encompass

ownership or operation of any facilities that would

cause an energy-related company to become an

electric utility company under the Act. See section

2(a)(3).

86Comments of GPU.

87Comments of Northeast.

88Many activities related to procurement,

transportation and storage of natural gas for sale are

permitted for gas-related companies, as discussed

below.

89Comments of GPU.

90Comments of AGA, CSW and Columbia.

91Comments of CSW.

92For instance, subsection (v) covers marketing of

energy commodities; subsection (vi) covers

production and sale of thermal energy products,

alternative fuels and renewable energy resources;

subsection (ix) covers ownership or operation of

fuel procurement, transportation, handling and

storage facilities; and subsection (x) covers

utilization of certain waste by-products of the

generation of electricity. In addition, as discussed

below, production of other fuels may be a permitted

activity for gas-related companies under some

circumstances.

93 Comments of Allegheny and Southern.

94 See Jersey Central Power & Light Co., Holding

Co. Act Release No. 24373 (April 16, 1987)

(investment in company developing a waste coalfired generating unit); American Electric Power Co.,

Holding Co. Act Release No. 26014 (March 30,

1994) (acquisition of securities of subsidiary that

develops backfill material using fly ash, a coal

waste by-product); and New England Electric

System, Holding Co. Act Release No. 26277 (April

26, 1995) (investment in a venture that installs

equipment to separate unburned carbon from coal

ash).

95 Registered holding companies generally

commented that this section should be expanded to

cover a broader range of telecommunication

services and products. Comments of CSW, Entergy

and GPU. New Orleans, however, commented that

this subsection should be eliminated as not in the

public interest due to possible cross-subsidization

problems and lack of relationship to the core utility

business.

intrasystem transactions. Persons

engaging in these activities and relying

upon the exemption provided by the

rule are advised to consider these

requirements.

Companies in both electric and gas

registered systems may acquire interests

in companies engaging in the activities

specified in this subsection. As adopted,

this subsection has been revised only to

the extent necessary to eliminate

redundant language.

(8) Subsection (b)(1)(viii): ownership

and operation of QFs. This subsection,

as proposed, included ownership or

operation of QFs and of facilities

necessary or incidental thereto.81 The

Commission received one comment on

this provision, proposing that

development of QFs also be included in

the rule.82 The Commission has

approved project development activities

in connection with QFs in a number of

cases.83 Such activities are implicit in

the subsection as proposed, and the

subsection has been revised to include

them specifically.

After careful review of the precedent

in this area under sections 9(a)(1) and

10, the Commission has also determined

that it is appropriate to make clear that

this subsection is intended to include

ownership and operation of only the

types of incidental facilities that are

required in order to meet the

requirements of PURPA.84 Subsection

(viii), as adopted, has been revised

accordingly.

Companies in both electric and gas

registered systems may acquire interests

in companies engaging in the activities

specified in this subsection.

(9) Subsection (b)(1)(ix): fuel facilities,

scrubbers, and resource recovery and

waste water treatment facilities. As

proposed, this subsection included

ownership and operation of fuel

procurement, transportation, handling

and storage facilities, scrubbers, and

resource recovery and waste water

treatment facilities.85 One registered

holding company suggests that servicing

of such facilities should also be

permitted.86 The subsection has been

revised expressly to permit such

activity.

Another registered holding company

suggests that this subsection should be

expanded to permit use of excess system

assets, such as office equipment and

space and excess space in billing

envelopes.87 The Commission believes

that this request is more appropriately

directed to subsection (b)(1)(vii) and has

addressed it in that context.

The Commission orders on which

inclusion of these activities is based

relate to generation of electricity. As a

result, the rule’s exemption for the

acquisition of a company that engages in

activities described in this subsection is

available only for companies in electric

registered systems.88

(10) Subsection (b)(1)(x): production,

transportation, distribution or storage of

other forms of energy. The activities in

this subsection concern all forms of

energy other than electricity and natural

or manufactured gas. Commenting

registered holding companies suggest

that the permitted activities should also

include the sale of these forms of

energy,89 as well as all activities in the

supply chain concerning them,

including development, exploration,

research and testing.90 The commenters

further propose that the subsection

specifically include sources of energy.91

The Commission has concluded that

the activities in this proposed

subsection duplicate in many respects

the activities included in other

subsections of the rule as adopted.92

Accordingly, this subsection has been

eliminated in the final rule.

(11) Subsection (b)(1)(xi): coal waste

by-products. This subsection includes

development and commercialization of

technologies or processes that utilize

coal waste by-products as an integral

component. Two registered holding

companies comment on this subsection

and request that it be expanded to

include all waste products and byproducts of generation of electricity and

natural gas production, as well as

investments in facilities and equipment

used in processes to improve wastes and

by-products or convert them into useful

goods.93 The Commission notes that, to

date, it has considered only cases

involving coal waste products and byproducts of electric generation, 94 and

this subsection is adopted as proposed.

Only companies in electric holding

company systems may acquire an

interest in a company engaged in the

activities in this subsection.

(12) Subsection (b)(1)(xii):

telecommunications facilities. This

subsection addresses the ownership,

sale, leasing or licensing of the use of

telecommunications facilities and

equipment. The Commission received

numerous comments on the advisability

and scope of this part of the rule.95 In

view of the passage in 1996 of the

Telecommunications Act, legislation

that exempts from the requirement of

prior Commission approval the

acquisition and retention by a registered

holding company of interests in

companies engaged in a broad range of

telecommunications activities and

businesses, these activities are not

included in the adopted rule.

2. Limitation on Investment

As noted above, the exemption of rule

58 is available so long as aggregate
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7909

96Comments of Entergy.

97Comments of AGA and Columbia.

98Comments of Columbia and Entergy.

99Rules 90, 91 and 92 under the Act, 17 CFR

250.90, 250.91 and 250.92.

100Comments of AGA.

101Comments of Consolidated, GPU and

Southern.

102Comments of AGA and GPU.

103The Commission notes that its jurisdiction

over the issuance and sale of securities by a

registered holding company and its subsidiaries to

finance investments in nonutility companies

pursuant to rule 58 will also serve to minimize risk

and to enable the Commission to monitor the effects

of nonutility activities on the registered system. The

Commission has jurisdiction over such financing

transactions under sections 6 and 7 of the Act, and

must consider certain effects of proposed financings

in determining whether the standards of the Act

have been satisfied. See the Proposing Release, 60

FR at 33646.

104One registered holding company also observes

in this regard that a standard based on consolidated

retained earnings would create uncertainty in a

registered holding company system’s planning.

Comments of CSW.

105Comments of Southern.

106Comments of GPU and Northeast.

107Comments of Allegheny and Southern.

108Comments of CSW.

109Section 32 of the Act provides that, in

determining whether to approve a proposed

issuance of securities related to EWG investments,

the Commission may not make certain negative

findings under the Act unless the proposed

transaction would have a substantial adverse

impact on the financial integrity of the registered

holding company system. Section 32(h)(3) and (4).

Section 32 also directs the Commission to adopt

regulations that would set forth ‘‘the actions which

would be considered to have a substantial adverse

impact on the financial integrity of the registered

holding company system [and] ensure that the

[financing in question] has no adverse impact on

any utility subsidiary or its customers, or on the

ability of State commissions to protect such

subsidiary or customers * * *.’’ Section 32(h)(6).

Rule 53 was adopted to effectuate these provisions.

If the rule’s safe harbor are satisfied, the

Commission is precluded from making the negative

findings specified in section 32(h)(3) and (4).

110The Commission stated that ‘‘(b)ecause EWGs

and foreign utility companies are still novel

entities, there is little experience on which to base

predictions concerning their performance * * *.

[R]etained earnings would best capture the effect

upon a system’s financial condition of reverses in

EWG and foreign utility company investments.’’

Holding Co. Act Release No. 25886 (Sept. 23, 1993),

58 FR 51488, 51493 (Oct. 1, 1993).

investment by a registered holding

company and its subsidiaries in energyrelated companies does not exceed the

greater of 15% of consolidated

capitalization or $50 million. As

proposed, investments in such

companies made pursuant to

Commission order prior to the effective

date of the rule would be excluded for

purposes of calculating the limitation.

In the Proposing Release, the

Commission requested specific

comment on (1) whether the proposed

investment limitation is reasonable

under the circumstances; (2) whether a

different measure of financial capacity,

such as consolidated retained earnings,

should be used instead; and (3) whether

it is appropriate to exclude prior

investments for purposes of the rule.

a. Need for a limitation. Some

commenters consider an investment

limitation to be unnecessary. They note

that the types of energy-related

businesses specified in the rule are

closely related to the utility industry 96

and that competitive markets and the

financial condition of any particular

registered holding company establish

prudent limits on diversification.97 They

state, further, that the Commission can

monitor the effects of diversification

through its review of holding company

financing,98 and they note that

consumers are protected against

potential cross-subsidization by various

factors, including the at-cost rules under

section 13 of the Act,99 rate regulation

and the companies’ need to be

competitive.100 Several commenters,

however, state that if the Commission

determines that a limitation is

appropriate, the proposed limitation is

reasonable.101 These commenters

consider a more restrictive standard to

be unnecessary.102

The Commission continues to believe

that it is appropriate to limit the

aggregate investment of a registered

holding company in energy-related

companies pursuant to the rule. Section

9(c)(3) by its terms contemplates that

the Commission will condition rules

thereunder upon such limitations as it

may prescribe as appropriate in the

ordinary business of a registered

holding company or its subsidiary

company and not detrimental to the

public interest or the interest of

investors or consumers. An aggregate

limitation upon investments pursuant to

the rule is appropriate to ensure that

acquisitions of interests in energyrelated companies are not so material as

to depart from the statutory concept of

transactions in the ordinary course of

business or to raise the possibility of

detriment to the protected interests.103

The Commission may revisit the need

for an investment limitation in rule 58

in the future, after gaining experience

with the use and effects of the

exemption provided by the rule.

b. Basis for calculation of the

limitation. New Orleans asserts that

either consolidated retained earnings or

consolidated equity is preferable to

consolidated capitalization as a means

to measure shareholder funds that are

not needed to meet the registered

system’s utility service obligations.

The commenting registered holding

companies oppose a standard based on

consolidated retained earnings. They

note that such earnings can vary

significantly as a result of factors that do

not affect financial health, such as

accounting changes and other

nonrecurring items.104 They also assert

that consolidated retained earnings are

primarily an indicator of ability to raise

new capital economically, and, to this

extent, lack relevance for the purpose of

setting a limitation upon investment

under the rule.105

The registered holding companies

generally support a standard based on

consolidated capitalization, because, in

their view, it offers flexibility 106 and a

meaningful measure of system financial

integrity.107 These commenters explain

that a flexible standard is appropriate

because the activities encompassed by

the exemption of the rule are closely

related to the utility business and have

been reviewed and approved by order of

the Commission.108

The Commission recently considered

a question of the appropriate basis for

an investment limitation in the context

of EWGs. Rule 53, adopted under

section 32 of the Act, provides a safe

harbor for approval of proposals to issue

securities related to investments in

EWGs.109 To qualify for the rule’s safe

harbor, the aggregate investment of the

registered holding company system in

EWGs and foreign utility companies

(‘‘FUCOs’’) cannot exceed 50% of the

system’s consolidated retained earnings.

In adopting rule 53, the Commission

determined that retained earnings was

an appropriate standard against which

to measure the safe harbor limitation on

these exempt investments.

Although the Commission has found

a standard based on consolidated

retained earnings to be appropriate in

the context of rule 53, it does not follow

that it is appropriate in the case of

investments in energy-related

companies. The Commission noted in

adopting the safe harbor provisions of

rule 53 that investments in EWGs and

FUCOs were new activities, and that the

potential risks, which could not

accurately be predicted, could

conceivably be significant. The

Commission rejected a test based on

consolidated capitalization, because it

would not directly reflect the effect of

losses in connection with an EWG or

FUCO investment. The Commission

concluded that the level of retained

earnings, which is directly sensitive to

losses, was a more appropriate standard

against which to measure these

investments.110 In contrast, as discussed

previously, investments under rule 58

are deemed to be appropriate within the

ordinary course of business of registered

systems and consistent with the
7910 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

111 Id.

112 In discussing the investment limitation, the

Commission stated that rule 53 is ‘‘intended to

protect system financial integrity and so protect

utilities and their ratepayers.’’ A ‘‘key factor’’ in this

regard is the ability of the holding company, which

is a source of capital for its utility subsidiaries, to

obtain financing at a reasonable cost. Retained

earnings was chosen as the basis of the safe harbor

investment limitation, among other things, because

they are linked to the cost of capital, and thus

provide a ‘‘fundamental protection.’’ 58 FR at

51492.

113 Comments of Allegheny.

114 New Orleans believes that the total of existing

investments and future investments under rule 58

would be so great as to be detrimental to ratepayers.

As of December 31, 1995, registered holding

companies had invested approximately $1.25

billion in companies that would be energy-related

companies within the meaning of rule 58(a). As of

that date, such investments represented

approximately 1.6% of consolidated capitalization

of the registered systems having such investments.

On an individual basis, no registered system had

more than approximately 5.6% of its consolidated

capitalization invested in energy-related companies

as of December 31, 1995. The Commission believes

that this level of investment does not raise any

significant issues of risks to the interests protected

by the Act. The Commission also notes that because

registered holding companies often make these

investments through nonutility subsidiaries, system

operating companies and their ratepayers are

insulated from exposure to any direct losses that

may result from the investments.

115Comments of CSW, EUA, GPU and Northeast.

116Comments of EUA.

117Comments of AGA.

118Comments of EUA and GPU.

119Comments of AEP, Consolidated, EUA,

Entergy and Southern.

120Comments of Entergy.

121See Holding Co. Act Release No. 26311 (June

20, 1995), 60 FR 33634 (June 28, 1995) (exempting

from the requirement of prior Commission approval

capital contributions and non-interest bearing open

account advances by parent companies to nonutility

subsidiaries, and the issuance by nonutility

subsidiaries and acquisition by their parents of

specified types of securities, the proceeds of which

are for use in the subsidiary’s existing business).

122Under this interpretation, amounts invested by

a registered system company in an energy-related

company during the period between adoption and

effectiveness will be excluded for purposes of

calculating aggregate investment; provided, that

such investments are used solely to fund activities

in which the company has previously been

authorized to engage by order of the Commission

and that such amounts are not disproportionate to

the current operations of such business. Since these

additional investments will fund activities that the

Commission has previously considered and

approved under sections 9(a)(1) and 10 of the Act,

the Commission does not believe that their

exclusion raises any significant concerns with

respect to protection of the interests covered by the

Act. Any investments in existing energy-related

companies made prior to the effective date of the

rule must be reported on Form U–9C–3.

123As discussed below, the Commission is

adopting amendments to rules 52 and 45 that

subject investments in energy-related companies to

the same limitations under these rules as are

applicable under rule 58. These limits apply to all

energy-related companies, regardless of whether the

initial investment in such company was made

pursuant to order or pursuant to rule 58.

protected interests under the Act. The

risks are more predictable and

presumably more limited. In rejecting

alternative bases for the investment

limitation in rule 53, the Commission

also noted that consolidated

capitalization ‘‘relates principally to the

capital structure created to fund the

holding company system’s domestic

utilities * * *,’’ 111 and thus is not a

particularly appropriate standard

against which to measure investments

in EWGs and FUCOs. This is not the

case for acquisitions of interests in

energy-related companies, whose

activities, as previously discussed, are

closely related to the core utility

business of a registered system. Because

total system capitalization is intended to

support the system’s utility business,

the Commission regards it as an

appropriate measure of the amount of

capital that may be invested in utilityrelated businesses. In addition, because

consolidated capitalization is a more

stable base of calculation than retained

earnings, the amount of the investment

cap would be less subject to

fluctuations.

The test in rule 53 was formulated to

effectuate the specific protections

required by section 32.112 In contrast,

section 9(c)(3), under which rule 58 is

adopted, deals with a different type of

investment than that covered by section

32, i.e., one appropriate in the ‘‘ordinary

course of business.’’ Investors and

consumers are protected not only

through the investment cap for energyrelated investments, but also through

this limitation.

In view of these considerations, the

Commission believes that a

consolidated capitalization standard is

appropriate for purposes of a limitation

on exempt investments under rule 58.

The final rule incorporates this

standard.

c. Treatment of previous investments.

The Commission received a significant

number of comments concerning the

proposed exclusion of prior investments

in energy-related companies, made

pursuant to Commission order, from the

calculation of aggregate investment for

purposes of the limitation of the rule.

New Orleans and one registered holding

company 113 assert that such prior

investments should be included in the

calculation.114 The majority of

commenters, however, consider the

‘‘grandfathering’’ of these investments to

be appropriate. These commenters note

that the investments have been found to

satisfy the requirements of the Act.115

Further, the commenters assert that

inclusion of prior investments would

penalize those registered holding

companies that have successful energyrelated programs in place,116 and also

prevent registered holding companies

from competing on an equal footing

with exempt holding companies and

companies not subject to the Act.117

Finally, the commenters contend that it

would be burdensome to require a

determination of whether or not various

prior investments are energy-related for

purposes of rule 58.118

Several commenters propose that the

limitation should exclude not only

investments made pursuant to

Commission order prior to the rule, but

also previously-authorized investments

that have not yet been made as of the

date of the rule.119 One commenter

suggests, in addition, that investments

that the Commission may authorize by

future order should be excluded for

purposes of the limitation of rule 58.120

This commenter also requests the

Commission to clarify whether previous

investments in energy-related

companies pursuant to other

exemptions should be excluded from

calculation of the investment limit. At

issue are investments by registered

holding companies in their nonutility

subsidiaries pursuant to rules 52 and 45,

as recently amended.121

The Commission believes that all

amounts that have actually been

invested in energy-related companies

pursuant to Commission order prior to

the date of effectiveness of the rule

should be excluded from the calculation

of aggregate investment under rule 58.

The Commission also believes it is

appropriate to exclude from the

calculation all investments made prior

to that date pursuant to available

exemptions.122

The Commission believes, however,

that any investment made after the date

of effectiveness of rule 58 should be

included for purposes of calculation of

the limitation, regardless of whether

these investments are made pursuant to

prior Commission order or available

exemptions.123 As for the question of

whether investments approved by order

after the date of effectiveness of rule 58

should be excluded from the

calculation, the Commission believes

that the issue is best addressed on a

case-by-case basis. This approach will

enable the Commission to consider the

effect of the particular transaction on

the registered system.

d. Definition of ‘‘aggregate

investment’’. Rule 58, as proposed,

defined ‘‘aggregate investment’’ to mean

all amounts invested, or committed to

be invested, in energy-related

companies, for which there is recourse,

directly or indirectly, to the registered

holding company. The Commission
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7911

124See Holding Co. Act Release No. 25886 (Sept.

23, 1993), 58 FR 51488 (Oct. 1, 1993). Rule

53(a)(1)(i) (17 CFR 250.53(a)(1)(i)) provides that

aggregate investment includes all amounts invested,

or committed to be invested, in exempt wholesale

generators and foreign utility companies, for which

there is recourse, directly or indirectly, to the

registered holding company. Among other things,

the term includes, but is not limited to, preliminary

development expenses that culminate in the

acquisition of an exempt wholesale generator or a

foreign utility company; and the fair market value

of assets acquired by an exempt wholesale generator

or a foreign utility company from a system company

(other than an exempt wholesale generator or a

foreign utility company).

125An indirect investment made through an

intermediate subsidiary will only be counted once

in the calculation of aggregate investment.

126Comments of CSW and Cinergy.

127Comments of AGA, Columbia and

Consolidated.

128See, e.g., Consolidated Natural Gas Co.,

Holding Co. Act Release No. 26363 (Aug. 28, 1995)

(sale of propane services); Columbia Gas System,

Holding Co. Act Release No. 25802 (April 22, 1993)

(marketing natural gas to nonaffiliates); National

Fuel Gas Co., Holding Co. Act Release No. 25437

(Dec. 20, 1991) (marketing, storage and

transportation of natural gas and pricing

consultation); National Fuel Gas Co., Holding Co.

Act Release No. 25265 (March 5, 1991) (exploration

and development of gas supply reserves); CNG

Transmission Corp., Holding Co. Act Release No.

25239 (Jan. 9, 1991) (development, construction and

operation of natural gas pipelines); and

Consolidated Natural Gas Co., Holding Co. Act

Release No. 25224 (Dec. 21, 1990) (development of

technologies to enhance the supply, transportation

and utilization of natural gas).

129See, e.g., National Fuel Gas Co., Holding Co.

Act Release No. 24381 (May 1, 1987) (drilling and

well maintenance and related services);

Consolidated Natural Gas Co., Holding Co. Act

Release No. 23023 (Aug. 5, 1983) (sale of natural gas

byproducts); National Fuel Gas Co., Holding Co.

Act Release No. 21903 (Feb. 2, 1981) (construction

of underground storage facilities); and Columbia

Gas System, Holding Co. Act Release No. 13610

(Nov. 27, 1957) (extraction and sale of natural gas

byproducts).

130See, e.g., National Fuel Gas Co., Holding Co.

Act Release Nos. 26181 (Dec. 6, 1994) and 24381

(May 1, 1987) (pipeline construction and

maintenance and related services).

131Comments of AGA and Columbia.

132See, e.g., 136 Cong. Rec. S17586 (Oct. 27,

1990) (Statement of Sen. D’Amato) (production and

sale of oil and other petroleum products may

constitute ‘‘production’’ for purposes of GRAA, if

oil and natural gas are present in the geologic

formation underlying a particular well).

stated that the term was intended to

have a meaning similar to that provided

by rule 53.124 The language of the

definition, as proposed, did not

specifically include amounts invested

by subsidiary companies that are

without guaranty by, or other recourse

to, the parent holding company. Such

investments, which are exempt under

subsection (a)(1) from the requirement

of Commission approval, are intended

to be included in calculating the

limitation under the rule. The rule as

adopted reflects this intent.125

In terms of the types of investments

encompassed, the scope of the

definition of ‘‘aggregate investment’’ in

rule 58 is intended to be similar to that

of rule 53. The term thus would include

amounts actually invested in an energyrelated company, as well as amounts

committed to be invested under the

terms of subscription agreements, or

stand-by or other similar capital funding

agreements.

B. Investments by Gas Registered

Holding Companies in Gas-Related

Companies

Rule 58(a)(2) exempts from the

requirement of prior Commission

approval under sections 9(a)(1) and 10,

pursuant to section 9(c)(3), the

acquisition by a gas registered holding

company or its subsidiary company of

securities of a ‘‘gas-related company,’’ as

defined. Such acquisitions are not

subject to any limitation as to amount.

A ‘‘gas-related company’’ is defined in

the Proposing Release as a company that

derives, or will derive, substantially all

of its revenues from activities permitted

under sections 2(a) and 2(b) of the

GRAA and such other nonutility

activities as the Commission may, from

time to time, by order upon application

under sections 9 and 10 and section 2(b)

of the GRAA, authorize a gas registered

holding company to engage in, and, in

so doing, designate as gas-related for

purposes of rule 58. The rule

contemplates that gas-related

companies, like energy-related

companies, will derive substantially all

of their revenues from the respective

activities designated in the rule.

1. Definition of ‘‘Gas-Related Company’’

Some commenters question whether

registered holding companies that have

only electric utility operations or that

have both electric and gas utility

operations should be entitled to invest

in gas-related companies on an

unlimited basis under the rule.126 The

portion of rule 58 that permits such

investments reflects and depends upon

findings under the GRAA that certain

activities satisfy the requirements of

sections 10 and 11 of the Act. The

GRAA is available only to companies in

systems in which the holding company

is registered solely by reason of

ownership of voting securities of gas

utility companies. As a result, other

registered holding company systems are

not entitled to the benefits of the GRAA

or the related provisions of rule 58. The

language of the rule has been clarified

to make this explicit.

Several commenters raise an issue

concerning the scope of the definition of

gas-related company.127 The definition,

as proposed, can be read to include

companies that derive substantially all

of their revenues from only the activities

specified in section 2(a) of GRAA and

activities found by the Commission, by

order, to satisfy the requirements of

section 2(b) of GRAA. This

interpretation would not, however, take

into account that some activities

specifically identified in section 2(b) as

being related to the supply of natural

gas (i.e., exploration, development,

production, marketing and manufacture

of natural or manufactured gas) were

found by the Commission to be

permissible under the standards of the

Act prior to the enactment of the GRAA,

and are not the subject of a subsequent

order under that legislation. Under rule

58 as proposed, a gas holding company

system might be required to obtain an

order under section 2(b) of GRAA in

order for these gas-related activities to

be covered by the rule’s exemption.

Activities of the type specified in

section 2(b) of GRAA were intended to

be included in the activities in which

gas-related companies may engage,

regardless of whether a Commission

order approving such activities was

issued under GRAA 128 or under

sections 9(a) and 10 prior to the

enactment of GRAA,129 or both.130 In all

of these cases, the Commission found

that the standards of sections 10 and 11

were satisfied, either through traditional

analysis or by means of the assumptions

created by GRAA. The rule has been

clarified to accomplish this result.

Several commenters also note that

other activities associated with the

natural gas supply chain, such as

exploration and production of

associated petroleum, were

contemplated to be included in GRAApermitted activities and should be

included in the activities permitted to

be engaged in by gas-related companies

under rule 58.131 The Commission

agrees that the activities in which a gasrelated company may engage under rule

58 should be consistent with those

contemplated by GRAA.132

The definition, as proposed,

contained a provision permitting

addition of new activities by order upon

application. As discussed above in the

context of energy-related companies,

this provision has not been included in

the rule as adopted.

The definition of a gas-related

company has also been revised, as was

the definition of an energy-related

company, to permit indirect investment

through intermediate subsidiaries.

2. Limitation on Investments in GasRelated Companies

The Commission requested comment

on whether a limitation on investments
7912 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

133Comments of AGA and Consolidated.

134Comments of Consolidated.

135See the Proposing Release, 60 FR at 33647.

136Comments of Allegheny (the rule’s investment

limitation protects investors and ratepayers, and the

Commission and the states can monitor activities

through Form U–9C–3); AEP (the investment

limitation and the fact that these activities are

conducted separately from utility operations

provide protections); AGA (each venture should be

viewed on a prospective basis, not on the basis of

past experience; adverse developments can be

monitored through reports filed with the

Commission, the FERC and state regulators);

Columbia (a ‘‘no bankruptcy’’ condition is contrary

to the policy of the bankruptcy laws, and

bankruptcy is irrelevant where the company

emerges with an investment grade rating);

Consolidated (the Commission can invoke its

jurisdiction if problems are perceived); Entergy (the

Commission can monitor investments in the context

of holding company financing approvals); GPU (the

state regulators and the FERC can protect ratepayers

from risk); and Southern (the rule addresses all

conditions necessary for satisfaction of section 10;

no other conditions are needed to protect against

cross-subsidization, since rule 58 companies are

still subject to the intrasystem transaction

provisions of the Act and such transactions must be

reported on Form U–9C–3).

137Comments of Columbia.

138Comments of New Orleans.

139See the discussion of the need for these

amendments in the Proposing Release. 60 FR at

33648.

140The Commission has proposed to amend rule

52 further to expand the types of securities that

qualify for the exemption. See Holding Co. Act

Release No. 26312 (June 20, 1995), 60 FR 33640

(June 28, 1995).

141Comments of Allegheny and Southern.

142Comments of Wisconsin Energy.

in gas-related companies is appropriate.

Two commenters state that no such

limitation is needed.133 They note,

among other things, that because many

activities involved in the gas business

are nonutility interests for purposes of

the Act, investment in such activities is

necessarily significant, and any

limitation would limit the usefulness of

the rule for gas registered systems.134 In

view of the Congressional intent,

evidenced by the GRAA, that gas

systems be permitted to engage in

certain gas-related activities without

restriction as to amount, the

Commission has not revised the rule to

add a limitation on those activities.135

C. Other Conditions to Use of the Rule

The Commission sought comment on

whether use of rule 58 should be

conditioned on meeting other types of

requirements, and the form such

conditions should take. Commenters

were invited to address the need for

additional conditions to use of the rule

58 exemption based on, for example, the

financial condition of the registered

holding company system, the extent of

losses experienced by the system over

recent periods and prior bankruptcies of

system companies.

The registered holding companies and

the American Gas Association

uniformly state, for various reasons, that

no further conditions to use of rule 58

are needed in order for investors and

consumers to be protected from risks.136

One holding company suggests that, if

conditions are imposed, they should be

based on current or future facts rather

than past circumstances.137 New

Orleans, however, disagrees and

suggests that use of the rule be

conditioned on a demonstration of

financial viability by the holding

company. New Orleans also

recommends that consumer safeguards

in the form of audit authority and access

to books and records for ratemaking

authorities be added.138

For several reasons, the Commission

believes that no additional conditions

are required in order to protect investors

and consumers from the risks of these

diversified activities. First, as noted

above, the rule addresses activities that

the Commission has determined

previously to be so closely related to

utility operations as to be in the

ordinary course of business of a

registered holding company and that, in

many instances, have been approved in

prior orders of the Commission under

sections 9(a)(1) and 10. In addition,

reasonable limitations on exempt

investments in energy-related

companies are an important feature of

the rule, designed to limit the financial

exposure of the registered system.

Finally, through the filing of Form U–

9C–3 under rule 58(c), both the

Commission and interested state

regulators will have the opportunity to

monitor the nature and scope of each

registered holding company system’s

activities pursuant to rule 58. In view of

these safeguards, the Commission is

adopting the rule without further

condition.

III. Proposed Amendments to Rule 52

and Rule 45

The Proposing Release requested

comment on proposed amendments to

rules 52 and 45 under the Act, to

conform the rules to rule 58.139 Rule

52(b), as currently in effect, exempts

from the requirement of Commission

approval under sections 6(a) and 7 of

the Act the issue and sale by a

nonutility subsidiary of a registered

holding company of any common stock,

preferred stock, bond, note or other form

of indebtedness, subject to certain

conditions. Rule 52(d) further exempts

from the requirement of prior

Commission approval under sections

9(a)(1) and 10 of the Act the acquisition

by a registered holding company of any

such security, provided that the

transaction does not involve the

formation of a new subsidiary.140

The exemptions under rule 52(b) and

52(d), both as previously in effect and

as proposed to be amended, are broader

than the exemption in proposed rule 58.

Accordingly, the Commission proposed

to amend rule 52 to add a limitation on

the aggregate amount of securities that

may be issued and sold by energyrelated companies and acquired by

associate companies, consistent with the

limitation of rule 58.

Rule 45(b) currently exempts from the

requirement of Commission approval

under section 12(b) of the Act and rule

45(a) thereunder certain investments in

existing subsidiaries by means of cash

capital contributions or open account

advances. In particular, rule 45(b)(4)

exempts without limitation any capital

contribution or open account advance

without interest to a subsidiary

company. Because this provision is

inconsistent with the investment

limitation in rule 58, the Commission

proposed to amend rule 45(b)(4) to

conform the aggregate amount of capital

contributions and open account

advances that may be made to energyrelated subsidiary companies to the

limitations of rule 58.

Few commenters express any view on

the proposed amendments to rules 52

and 45. Two registered holding

companies support adoption of the

amendments.141 An exempt holding

company opposes the amendments as

unnecessary and as potentially limiting

the Commission’s flexibility under rule

58.142

Without the proposed conforming

changes, registered holding companies

could use rule 58 to make initial

acquisitions of securities of energyrelated companies, and arguably could

use rules 45 and 52 to make additional

unlimited acquisitions of securities of

such companies, in each instance

without Commission approval. To

permit this result would render

meaningless the limitations of rule 58

on investments in energy-related

companies. In addition, a question

would arise whether section 9(c)(3),

under which rule 58 is promulgated,

permits such acquisitions of securities

without Commission oversight. The

Commission believes that the proposed

amendments are necessary in order to

carry out the purposes of rule 58.

Accordingly, the amendments are

adopted in the form proposed.

IV. Other Proposals in Connection With

Rule 58

Several commenters propose changes

to other rules or Commission orders to
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7913

143 17 CFR 250.16.

144Comments of Columbia and Consolidated.

145For instance, the Commission has conditioned

approval of acquisitions of energy services and

demand-side management businesses on a

requirement that at least 50% of revenues be

derived from a specified geographic area, within the

system’s retail service territory and contiguous

areas. See, e.g., Entergy Corp., Holding Co. Act

Release No. 25718 (Dec. 28, 1992); and Northeast

Utilities, Holding Co. Act Release No. 25114 (July

3, 1990). In addition, the registered system was

required in some instances to divest its equity

interest in the nonutility business within a

specified period. See, e.g., Entergy Corp., Holding

Co. Act Release No. 25718.

146The rule does not incorporate geographic

limitations based on the retail service territory of

the registered holding company system. However,

based on existing precedent and the markets with

which the Commission is currently familiar,

activities permitted by the rule are limited to the

United States. The rule has been modified to make

this limitation clear.

147Comments of CSW.

148Comments of Entergy, GPU and Northeast.

149Rule 87 specifies the cases in which

subsidiaries of registered holding companies may

perform services or construction for or sell goods

to associate companies, subject to compliance with

the ‘‘at cost’’ rules and certain other conditions.

150Rule 90 sets forth the general rule that any

transaction involving service, construction or sale

of goods between a subsidiary of a registered

holding company and an associate company must

be performed at cost, as defined, and provides

exceptions.

151 17 CFR 250.87(b)(1).

152Comments of GPU. Rule 48 currently exempts

financing in connection with purchases by utility

customers of standard electric and gas appliances.

17 CFR 250.48.

153See comments of Northeast.

154Amendment of rule 48 is beyond the scope of

this rulemaking.

155See the Proposing Release, 60 FR at 33648.

Cinergy suggests that, to the extent that information

Continued

conform them to the provisions of rule

58. These proposals are discussed

below.

A. Rule 16

As currently in effect, rule 16 under

the Act provides that any company and

its affiliates will be exempt from all

obligations, duties or liabilities imposed

by the Act upon subsidiaries or affiliates

of a registered holding company, if (1)

the company is not a public-utility

company, (2) the company engages

primarily in certain specified activities

related to the supply of natural or

manufactured gas, (3) less than 50% of

the voting stock of the company is

owned by registered holding companies,

and (4) the acquisition by a registered

holding company of an interest in the

company was approved by the

Commission upon application.143

Several commenters suggest that the

coverage of the rule 16 exemption be

extended to energy-related companies

and gas-related companies, as defined in

rule 58, and their affiliates.144

The Commission believes that a

proposal to amend rule 16 to make it

consistent with rule 58, and to enhance

its usefulness (which is limited at

present), should be considered. Such an

amendment, however, is beyond the

scope of this rulemaking.

B. Existing Limitations on Investments

in Energy-Related Companies

In the past, the Commission in some

instances incorporated conditions and

limitations in certain orders approving

energy-related activities, including a

requirement that an energy-related

company derive at least 50% of its

revenues from associate companies or

from specified geographic areas.145 As

discussed above, these geographic and

other limitations are not included in

rule 58 as adopted.146 One commenter

suggests that any 50% limitation in an

order approving the acquisition of an

interest in a business that would qualify

as energy-related under rule 58 should

cease to apply by virtue of the rule,

without any need for an amended

order.147

The Commission agrees that, where

an order approving the acquisition or

retention of a nonutility business by a

registered holding company system

includes a limitation of the type

discussed above, and such limitation

would not apply if the interest held by

the registered holding company system

were acquired under rule 58, the

limitation in the order should no longer

apply. These conditions are effectively

superseded by rule 58, and no further

filings and orders are needed to

eliminate them.

C. Associate Transactions

Several commenters suggest that

transactions between an energy-related

company and some or all of its associate

companies should be exempt from the

requirements of the Act and rules

thereunder,148 including the rules under

section 13(b) of the Act. Section 13(b) of

the Act generally requires that

intrasystem service, sales and

construction contracts be performed in

accordance with such terms and

conditions as the Commission may

prescribe, either by rule or order, ‘‘as

necessary or appropriate in the public

interest or for the protection of investors

or consumers and to insure that such

contracts are performed economically

and efficiently for the benefit of such

associate companies, at cost, fairly and

equitably allocated among such

companies.’’ Entergy Corporation

suggests that rule 87 under the Act 149 be

amended to provide that transactions

subject to section 13(b) do not require

an order upon application. General

Public Utilities Corporation suggests an

amendment of rule 90 150 to exclude

transactions between an energy-related

company and its associates from the atcost standards. Northeast Utilities

suggests that all transactions between an

energy-related company and its affiliates

should be exempt from the Act.

Section 13(b) authorizes the

Commission to exempt conditionally or

unconditionally such transactions as it

may determine, by rule or order, to be

consistent with the protected interests,

if such transactions ‘‘(1) are with any

associate company which does not

derive, directly or indirectly, any

material part of its income from sources

within the United States and which is

not a public-utility company operating

within the United States, or (2) involve

special or unusual circumstances or are

not in the ordinary course of business.’’

It does not appear that the Commission

has previously considered its authority

to grant other exemptions from the

requirements of section 13(b).

The commenters’ requests are beyond

the scope of the proposed rulemaking.

In addition, the Commission believes

that it would be inappropriate to

address the issues raised in the limited

context of the activities addressed in

rule 58. Nonutility companies in

registered holding company systems

have, in any event, substantial freedom

to engage in transactions with associate

nonutility companies under rule

87(b)(1).151 The Commission declines to

accept the commenters’ suggestions.

D. Rule 48

One commenter suggests that rule 48

under the Act be amended to permit

energy-related companies to engage in

customer financing in connection with

their energy-related businesses.152 As

noted previously, customer financing in

connection with certain energy-related

activities has been approved by order in

the past. The Commission considered

whether customer financing should be

included in rule 58, either as a separate

energy-related activity or as an aspect of

other energy-related activities.153

However, it appears that an amendment

to rule 48 would be the appropriate

measure to address this question.154

V. Quarterly Reports on Form U–9C–3

The Commission proposed that

registered systems provide periodic

information with respect to all energyrelated and gas-related company

subsidiaries on Form U–9C–3, in lieu of

the separate rule 24 certificates required

under the terms of any outstanding

Commission orders.155 This procedure
7914 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

on securities issuances is reported on Form U–9C–

3, reports under rule 52 on Form U–6B–2 reporting

the same information should not be required. Such

a change may be appropriate, but is beyond the

scope of this rulemaking.

156Comments of AGA.

157Comments of Columbia. See Item 9 of Form

U5S, 17 CFR 259.5s.

158Comments of Columbia.

159Comments of New Orleans.

160Comments of AGA and Columbia.

161Comments of Entergy.

162Comments of Allegheny.

163Comments of Southern.

164 Id.

165Comments of Allegheny, AGA, Columbia,

Consolidated, Entergy and Southern.

166Comments of Cinergy.

167Comments of AEP.

168Comments of CSW. The rule has been revised

to clarify that the filing requirement is not

continuous.

169Comments of Columbia. Cinergy commented

that financial statements should be filed with the

form only upon the initial acquisition of securities

of an energy-related or gas-related company;

thereafter, the consolidating financial statements in

Form U5S would provide sufficient updating

information.

170Comments of Allegheny and Southern.

171Comments of Southern.

172Comments of Allegheny and Southern.

173As discussed previously, indirect investment

in energy-related and gas-related companies

through intermediate subsidiaries is permitted

under the rule as adopted.

174Comments of Allegheny, Columbia and

Southern.

175Comments of Consolidated and Northeast.

was intended to lessen the reporting

burden for holding companies, and to

make available a single, comprehensive

report covering all energy-related and

gas-related business activities of a

registered holding company for the

interested state commissions, with

which the report must also be filed.

The Commission requested comment

on the form and content of Form U–9C–

3. In particular, the Commission sought

comment on whether a report should be

filed quarterly or on a semiannual or

other basis. The Commission also

requested comment on whether any

special reporting requirements may be

needed with respect to the revenues

derived from any activities of such

companies other than the activities

specified in the rule, to ensure that

energy-related and gas-related

companies derive substantially all of

their revenue from such activities, as

required by the rule.

Several commenters assert that the

form should not be adopted, because

Form U5S provides sufficient

information to enable regulators to

protect consumers 156 and could be

modified to require reporting of rule 58

investments in a manner similar to

treatment of exempt wholesale

generators and foreign utility

companies.157 One commenter suggests

that no reporting requirements are

needed with respect to investments in

gas-related companies, since there are

no limits on these investments.158 Most

commenters suggest that changes be

made to the form if it is adopted.

With respect to the timing of

reporting, one commenter, New

Orleans,159 specifically approves of

quarterly filings, on the ground that

regulators need quarterly reports in

order to monitor activities and institute

corrective action. Most industry

commenters, however, object to

quarterly filings, because the

information in the proposed form

duplicates other periodic reports, such

as that on Form U5S;160 because annual

filings achieve the purpose of assuring

compliance with the conditions of the

rule;161 because competitors are not

burdened with preparation of the

form;162 because the benefits of

quarterly reporting do not justify its

costs;163 and because rule 58 companies

should not be required to file more

frequently than holding companies and

service companies.164 Many of these

commenters believe that annual filings

are appropriate,165 although one favors

semiannual reporting,166 and another

proposes that the bulk of the

information be filed annually, with

quarterly filings used to report any

changes during the quarter.167 One

commenter suggests that the form be

clarified to indicate that filings are to be

made quarterly rather than

‘‘continuously.’’ 168 The Commission has

concluded that the filing of complete

and current financial statements and

other information (particularly

information on transactions between

rule 58 companies and their affiliates) in

each quarterly report will facilitate

appropriate monitoring of acquisitions

pursuant to the rule. The form, as

adopted, thus requires quarterly

reporting.

Many commenters express concern

with the type of reporting required by

the proposed form, particularly the

required financial statements. The

commenters believe that this

requirement is burdensome, and

unnecessary, because registered systems

file consolidating financial statements

in their annual reports on Form U5S; 169

because separate financial information

would be required even for a company

in which only a minor investment is

made; 170 because state regulators are

interested in nonutility operations as a

whole rather than separate

components; 171 and because separate

financial statements would be required

for each subsidiary in cases where

investments are structured through

several tiers of subsidiaries.172 The

Commission believes that the filing of

financial information for each

investment under rule 58 is appropriate

to enable the Commission and the

interested state commissions to monitor

activity under the rule. The Commission

is, however, modifying certain of the

requirements in the form as proposed to

deal with certain issues raised by

commenters on the proposal.

The purpose of requiring financial

statements is to provide information on

each significant investment, not to

compel holding companies to prepare

financial statements for shell

companies. As a result, the form, as

adopted, permits consolidation of the

financial statements of downstream

subsidiaries with those of the first-tier

energy-related or gas-related

company,173 so long as the first-tier

subsidiary owns interests only in

companies engaged in one permitted

activity.

The Commission also recognizes that

the filing of financial statements for

companies in which the registered

system holds only a small interest may

be overly burdensome without offering

a significant measure of protection for

utility shareholders and consumers.

Accordingly, the form, as adopted,

requires the filing of financial

statements only for companies in which

the registered system has at least a 50%

equity or other ownership interest. The

form provides that, for all other rule 58

companies, the registered holding

company will make available to the

Commission such financial statements

as are available to it.

A number of commenters express

concern that the form will result in

disclosure of confidential financial and

other commercially sensitive

information that may damage the

holding company’s competitive

position.174 The Commission agrees that

confidentiality of certain business

information is an important concern. As

noted in the Proposing Release,

however, the form does not require

reporting of sensitive information such

as identity of customers. Further,

applicants may claim confidential

treatment pursuant to rule 104 under

the Act for some items of information.

Thus, commercially sensitive

information should have adequate

protection.

Other changes in the final form

include the following. The filing

instructions have been revised to reflect

electronic filing under the

Commission’s EDGAR system.175 Also,

the report for the last period in the

reporting company’s fiscal year will be
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7915

176Comments of Northeast.

177Comments of Cinergy.

178Comments of Allegheny. While the reporting

of associate transactions is a primary purpose of the

form, it is also intended to solicit information

through which the staff of the Commission and

interested state commissions can monitor

compliance with the limitations of the rule,

including limitations on the type of activities in

which the company in question is engaged.

179Comments of AGA (information in Form U5S

is adequate for this purpose); CSW (existing

proposed reporting requirements could be reduced

and still provide this assurance); Consolidated (if

further assurance is needed, a statement of

compliance could be included in the Form U5S)

and Entergy and Northeast (Form U–9C–3 provides

sufficient information to put regulators on notice of

other activities).

due 90 days, rather than 60 days, after

the end of the period.176 Finally, the

form has been clarified to require

disclosure with respect to all energyrelated and gas-related companies in

which investments were made during

the reporting period.177 Other specific

comments were not adopted, including

a suggestion that all items except 5(b)

(relating to associate transactions) are

unnecessary.178 In addition, the form

has been revised to provide a format for

reporting of the required information

and to clarify generally the filing

instructions.

Commenters believe that no other

new reporting requirements are needed

to assure that rule 58 companies derive

substantially all of their revenues from

permitted activities.179 The Commission

has concluded that Form U–9C–3,

together with other existing reporting

requirements, provides sufficient

information for this purpose, and that

no additional new requirements are

needed.

VI. Conclusion

The Commission believes that

registered holding company systems

should be relieved of the regulatory

burden of having to file multiple

applications for authority to engage,

through acquisitions of securities, in

nonutility activities that are closely

related to utility operations and that are

of the same character or type as those

the Commission has allowed in

previous cases. Rule 58 is intended to

permit investments in energy-related

companies and gas-related companies,

as defined, without geographic limits

based on the registered system’s service

territory or other restrictions similar to

those incorporated in some previous

orders. The Commission believes that

the limitation of the rule on the

aggregate amount that a registered

holding company system may invest,

directly or indirectly, in energy-related

companies should help to assure that

the public interest and the interest of

investors and consumers will not be

adversely affected by acquisitions made

pursuant to the rule. In addition, the

reporting requirements should enable

the Commission and interested state and

local regulators to monitor financial and

other effects of such transactions.

Regulatory Flexibility Act Certification

Pursuant to section 605(b) of the

Regulatory Flexibility Act, the Chairman

of the Commission has certified as

follows:

I, Arthur Levitt, Chairman of the Securities

and Exchange Commission, hereby certify

pursuant to 5 U.S.C. 605(b) that proposed

rule 58 and proposed amendments to rules

45 and 52 under the Public Utility Holding

Company Act of 1935, as amended (15 U.S.C.

79 et seq.), together concerning the

acquisition by a registered holding company

and its subsidiaries of securities of certain

nonutility companies, without a filing

requirement, will not have a significant

impact on a substantial number of small

businesses. The reason for this certification is

that it does not appear that any small

businesses would be affected by the proposed

rule and rule amendments.

Arthur Levitt, Chairman

Dated: June 19, 1995.

The Commission did not receive any

comments with respect to the

Chairman’s certification.

Costs and Benefits

Rule 58 will substantially decrease

regulatory costs for the twelve (12)

electric and three (3) gas registered

holding companies. In calendar year

1995, 35 applications would not have

been filed had the proposed rule 58 and

related rule amendments been in place.

Estimated savings per application

would have been approximately

$28,000, including related legal,

accounting, and management costs.

Thus, for 35 applications filed in

calendar year 1995, the aggregate

savings would have been approximately

$980,000 per year. Moreover, the

reduction in Commission staff hours

would have been approximately 3,800

hours (approximately 2 staff years). The

only cost to the registered holding

companies in complying with the rule

will be the cost of completing and filing

Form U–9C–3 on a quarterly basis. It is

estimated that approximately 16 hours

will be required to complete each form

at an estimated cost of $100 per hour.

Assuming 56 form submissions per year,

the cost of compliance reporting would

approximate $89,600 per year.

Paperwork Reduction Act

The proposed rule and rule

amendments are subject to the

Paperwork Reduction Act of 1980 (44

U.S.C. 3501 et seq.) and have been

submitted to the Office of Management

and Budget for approval for use through

September 30, 1998.

Statutory Authority

The Commission is adopting rule 58

and amending rules 45 and 52 pursuant

to sections 6, 9, 12 and 20 of the Act.

List of Subjects in 17 CFR Parts 250 and

259

Electric utilities, Holding companies,

Natural gas, Reporting and

recordkeeping requirements, Securities.

Text of Rules

For the reasons set out in the

preamble, chapter II, title 17, of the

Code of Federal Regulations is amended

as follows:

PART 250—GENERAL RULES AND

REGULATIONS, PUBLIC UTILITY

HOLDING COMPANY ACT OF 1935

1. The authority citation for part 250

continues to read as follows:

Authority: 15 U.S.C. 79c, 79f(b), 79i(c)(3),

79t, unless otherwise noted.

2. Section 250.45 is amended by

revising paragraph (b)(4) to read as

follows:

§ 250.45 Loans, extensions of credit,

donations and capital contributions to

associate companies.

* * * * *

(b) Exceptions. * * *

(4) Capital contributions or open

account advances, without interest, by a

company to its subsidiary company;

Provided, That capital contributions or

open account advances to any energyrelated company subsidiary, as defined

in § 250.58, shall not be exempt

hereunder unless, after giving effect

thereto, the aggregate investment by a

registered holding company or any

subsidiary thereof in such company and

all other such energy-related company

subsidiaries does not exceed the

limitation in § 250.58(a)(1).

* * * * *

3. Section 250.52 is amended by

revising paragraph (b) to read as follows:

§ 250.52 Exemption of issue and sale of

certain securities.

* * * * *

(b) Any subsidiary of a registered

holding company which is not a holding

company, a public-utility company, an

investment company, or a fiscal or

financing agency of a holding company,

a public-utility company or an

investment company shall be exempt

from section 6(a) of the Act (15 U.S.C.

79f(a)) and rules thereunder with

respect to the issue and sale of any
7916 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

common stock, preferred stock, bond,

note or other form of indebtedness, of

which it is the issuer if:

(1) The issue and sale of such security

are solely for the purpose of financing

the existing business of such subsidiary

company; and

(2) The interest rates and maturity

dates of any debt security issued to an

associate company are designed to

parallel the effective cost of capital of

that associate company; Provided, That

any security issued to an associate

company by any energy-related

company subsidiary, as defined in

§ 250.58, shall not be exempt hereunder

unless, after giving effect thereto, the

aggregate investment by a registered

holding company or any subsidiary

thereof in such subsidiary and all other

such energy-related company

subsidiaries does not exceed the

limitation in § 250.58(a)(1).

* * * * *

4. Section 250.58 is added to read as

follows:

§ 250.58 Exemption of investments in

certain nonutility companies.

(a) Exemption from Section 9(a).

Section 9(a) of the Act (15 U.S.C. 79i(a))

shall not apply to:

(1) The acquisition by a registered

holding company, or a subsidiary

company thereof, of the securities of an

energy-related company; Provided, That,

after giving effect to any such

acquisition, the aggregate investment by

such registered holding company and

subsidiaries in all such companies does

not exceed the greater of:

(i) $50 million; or

(ii) 15% of the consolidated

capitalization of such registered holding

company, as reported in the registered

holding company’s most recent Annual

Report on Form 10–K or Quarterly

Report on Form 10–Q (§ 249.308a or

§ 249.310 of this chapter) filed under the

Securities Exchange Act of 1934, as

amended (15 U.S.C. 78 et seq.); or

(2) The acquisition by a holding

company that is registered solely by

reason of ownership of voting securities

of gas utility companies, or a subsidiary

company thereof, of the securities of a

gas-related company.

(b) Definitions. For purpose of this

section:

(1) The term energy-related company

shall mean any company that, directly

or indirectly through one or more

affiliates, derives or will derive

substantially all of its revenues

(exclusive of revenues from temporary

investments) from one or more of the

following activities within the United

States:

(i) The rendering of energy

management services and demand-side

management services;

(ii) The development and

commercialization of

electrotechnologies related to energy

conservation, storage and conversion,

energy efficiency, waste treatment,

greenhouse gas reduction, and similar

innovations;

(iii) The ownership, operation, sale,

installation and servicing of refueling,

recharging and conversion equipment

and facilities relating to electric and

compressed natural gas powered

vehicles;

(iv) The sale of electric and gas

appliances; equipment to promote new

technologies, or new applications for

existing technologies, that use gas or

electricity; and equipment that enables

the use of gas or electricity as an

alternate fuel; and the installation and

servicing thereof;

(v) The brokering and marketing of

energy commodities, including but not

limited to electricity, natural or

manufactured gas and other combustible

fuels;

(vi) The production, conversion, sale

and distribution of thermal energy

products, such as process steam, heat,

hot water, chilled water, air

conditioning, compressed air and

similar products; alternative fuels; and

renewable energy resources; and the

servicing of thermal energy facilities;

(vii) The sale of technical,

operational, management, and other

similar kinds of services and expertise,

developed in the course of utility

operations in such areas as power plant

and transmission system engineering,

development, design and rehabilitation;

construction; maintenance and

operation; fuel procurement, delivery

and management; and environmental

licensing, testing and remediation;

(viii) The development, ownership or

operation of ‘‘qualifying facilities,’’ as

defined under the Public Utility

Regulatory Policies Act of 1978, as

amended (‘‘PURPA’’), and any

integrated thermal, steam host, or other

necessary facility constructed,

developed or acquired primarily to

enable the qualifying facility to satisfy

the useful thermal output requirements

under PURPA;

(ix) The ownership, operation and

servicing of fuel procurement,

transportation, handling and storage

facilities, scrubbers, and resource

recovery and waste water treatment

facilities; and

(x) The development and

commercialization of technologies or

processes that utilize coal waste byproducts as an integral component of

such technology or process; Provided,

That any company engaged in the

activities specified in paragraphs

(b)(1)(ii), (b)(1)(iii) with respect to

electric powered vehicles, (b)(1)(vi),

(b)(1)(ix) or (b)(1)(x) of this section, shall

be an ‘‘energy-related company’’ for

purposes of this section only if the

securities of such company are

acquired, directly or indirectly, by a

registered holding company whose

public-utility company subsidiaries are

primarily electric utility companies; and

Provided further, That any company

engaged in the activities specified in

paragraph (b)(1)(iii) of this section with

respect to compressed natural gas

powered vehicles, shall be an ‘‘energyrelated company’’ for purposes of this

section only if the securities of such

company are acquired, directly or

indirectly, by a registered holding

company whose public-utility company

subsidiaries are primarily gas utility

companies.

(2) The term gas-related company

shall mean any company that, directly

or indirectly through one or more

affiliates, derives or will derive

substantially all of its revenues

(exclusive of revenues from temporary

investments) from one or more of the

following activities within the United

States:

(i) Activities permitted under section

2(a) of the Gas-Related Activities Act of

1990, 104 Stat. 2810; and

(ii) Activities specified in section 2(b)

of the Gas-Related Activities Act and

approved by order of the Commission

under sections 9 and 10 of the Act (15

U.S.C. 79i–j).

(3) The term aggregate investment

shall mean all amounts invested or

committed to be invested in energyrelated companies, for which there is

recourse, directly or indirectly, to the

registered holding company or any

subsidiary company thereof.

(c) Report on related business

activities. For each quarter of the fiscal

year of the registered holding company

in which any acquisition that is exempt

under this section is made, and for each

such quarter thereafter in which the

acquired interest is held, the registered

holding company shall file with this

Commission and with each state

commission having jurisdiction over the

retail rates of the public-utility

subsidiary companies of such registered

holding company a Quarterly Report on

Form U–9C–3 (§ 259.208 of this

chapter). Such filing shall be made

within 60 days following the end of the

first three quarters of the fiscal year, and

within 90 days after the end of the

fourth quarter.
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7917

PART 259—FORMS PRESCRIBED

UNDER THE PUBLIC UTILITY

HOLDING COMPANY ACT OF 1935

5. The authority citation for part 259

continues to read as follows:

Authority: 15 U.S.C. 79e, 79f, 79g, 79j, 79l,

79m, 79n, 79q and 79t.

6. Section 259.208 and Form U–9C–3

are added to read as follows:

§ 259.208 Form U–9C–3, for notification of

acquisition of securities exempt from

section 9(a) pursuant to rule 58 (§ 250.58 of

this chapter).

This form shall be filed pursuant to

§ 250.58(c) as the certificate of

notification of an acquisition of

securities exempted from the

application of section 9(a) of the Act (15

U.S.C. 79a et seq.) pursuant to § 250.58.

[Editorial Note: The text of Form U–9C–3

appears in the appendix to this document

and will not appear in the Code of Federal

Regulations.]

Dated: February 14, 1997.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

Appendix

Note: This form will not appear in the Code of Federal Regulations.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM U–9C–3

QUARTERLY REPORT PURSUANT TO RULE 58

llllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll

(Name of registered holding company)

llllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll

(Address of principal executive offices)

GENERAL INSTRUCTIONS

A. Use of Form

1. A reporting company, as defined herein, shall file a report on this form within 60 days after the end of each of the first

three quarters, and within 90 days after the end of the fourth quarter, of the fiscal year of the registered holding company. The

period beginning on the date of effectiveness of rule 58 and ending at the end of the quarter following the quarter in which the

rule becomes effective shall constitute the initial period for which any report shall be filed, if applicable. 2. The requirement to provide specific information by means of this form supersedes and replaces any requirement by order

of the Commission to provide identical information by means of periodic certificates under rule 24; but does not so supersede and

replace any requirement by order to provide information by means of an annual report on Form U–13–60. 3. Information with respect to reporting companies that is required by Form U–13–60 shall be provided exclusively on that form.

4. Notwithstanding the specific requirements of this form, the Commission may informally request such further information as,

in its opinion, may be necessary or appropriate.

B. Statements of Monetary Amounts and Deficits

1. Amounts included in this form and in related financial statements may be expressed in whole dollars, thousands of dollars

or hundred thousands of dollars.

2. Deficits and other similar entries shall be indicated by either brackets or parentheses. An explanation should be provided

by footnote.

C. Formal Requirements

This form, including exhibits, shall be filed with the Commission electronically pursuant to Regulation S–T (17 CFR 232.10 et

seq.). A conformed copy of each such report shall be filed with each state commission having jurisdiction over the retail rates of

a public-utility company that is an associate company of a reporting company. Each report shall provide the name and telephone

number of the person to whom inquiries concerning the report should be directed.

D. Definitions

As used in this form, the word ‘‘reporting company’’ means an energy-related company or gas-related company, as defined in

rule 58(b). All other words and terms have the same meaning as in the Public Utility Holding Company Act of 1935, as amended,

and the rules and regulations thereunder.

ITEMS

ITEM 1—ORGANIZATION CHART

Name of reporting

company

Energy or gas-related

company

Date of

organization

State of

organization

Percentage of voting

securities held

Nature of

business

Instructions

1. Complete Item 1 only for the first three calendar quarters of the fiscal year of the registered holding company.

2. Under the caption ‘‘Name of Reporting Company,’’ list each energy-related and gas-related company and each system company

that directly or indirectly holds securities thereof. Add the designation ‘‘(new)’’ for each reporting company of which securities were

acquired during the period, and the designation ‘‘(*)’’ for each inactive company. 3. Under the caption ‘‘Percentage of Voting Securities Held,’’ state the aggregate percentage of the outstanding voting securities

of the reporting company held directly or indirectly by the registered holding company at the end of the quarter. 4. Provide a narrative description of each reporting company’s activities during the reporting period.

ITEM 2—ISSUANCES AND RENEWALS OF SECURITIES AND CAPITAL CONTRIBUTIONS

Company

issuing

security

Type of

security

issued

Principal

amount of

security

Issue or

renewal

Cost of

capital

Person to

whom security

was issued

Collateral

given with

security

Consideration

received for

each security
7918 Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations

Instruction

With respect to a transaction with an associate company, report only the type and principal amount of securities

involved.

Company contributing

capital

Company receiving

capital

Amount of capital

contribution

ITEM 3—ASSOCIATE TRANSACTIONS

Part I—Transactions Performed by Reporting Companies on Behalf of Associate Companies

Reporting company rendering

services

Associate company receiving

services

Types of

services

rendered

Direct

costs

charged

Indirect

costs

charged

Cost of

capital

Total

amount

billed

Part II—Transactions Performed by Associate Companies on Behalf of Reporting Companies

Reporting company rendering

services

Associate company receiving

services

Types of

services

rendered

Direct

costs

charged

Indirect

costs

charged

Cost of

capital

Total

amount

billed

Instructions

1. This item is used to report the performance during the quarter of contracts among reporting companies and their associate

companies, including other reporting companies, for service, sales and construction. A copy of any such contract not filed previously

should be provided as an exhibit pursuant to Item 6. B. 2. Parts I and II concern transactions performed by reporting companies on behalf of associate companies, and transactions performed

by associate companies on behalf of reporting companies, respectively.

ITEM 4—SUMMARY OF AGGREGATE INVESTMENT

Investments in energy-related companies:

Total consolidated capitalization as of llllll ................................................................ $xxx,xxx ........................ Line 1.

Total capitalization multiplied by 15% (line 1 multiplied by 0.15) ........................................ xxx,xxx ........................ Line 2.

Greater of $50 million or line 2 .................................................................................................. ........................ $xxx,xxx Line 3.

Total current aggregate investment:

(categorized by major line of energy-related business)

Energy-related business category 1 ...................................................................................... xxx,xxx ........................

Energy-related business category 2 ...................................................................................... xxx,xxx ........................

Etc. ......................................................................................................................................... xxx,xxx ........................

Total current aggregate investment .............................................................................. ........................ xxx,xxx Line 4.

Difference between the greater of $50 million or 15% of capitalization and the total aggregate investment of the registered holding company system (line 3 less line 4)......................... $xxx,xxx Line 5.

Investments in gas-related companies:

Total current aggregate investment:

(categorized by major line of gas-related business)

Gas-related business category .............................................................................................. xxx,xxx ........................

Gas-related business category 2 ........................................................................................... xxx,xxx ........................

Etc. ......................................................................................................................................... xxx,xxx ........................

Total current aggregate investment .............................................................................. xxx,xxx

ITEM 5—OTHER INVESTMENTS

Major line of energy-related

business

Other investment in last

U–9C–3 report

Other investment in this

U–9C–3 report

Reason for difference in

other investment

Instruction

This item concerns investments in energy-related and gas-related companies that are excluded from the calculation of aggregate

investment under rule 58.

ITEM 6—FINANCIAL STATEMENTS AND EXHIBITS

List all financial statements and exhibits filed as a part of this report.

Instructions

A. Financial Statements

1. Financial statements are required for reporting companies in which the registered holding company system has at least a 50%

equity or other ownership interest. For all other rule 58 companies, the registered holding company shall make available to the

Commission such financial statements as are available to it.

2. For each reporting company, provide a balance sheet as of the end of the quarter and income statements for the three-month

and year-to-date periods ending as of the end of the quarter, together with any notes thereto. Financial statements shall be provided

only for the first three calendar quarters of the fiscal year of the registered holding company.
Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / Rules and Regulations 7919

3. If a reporting company and each of its subsidiaries engage exclusively in a single category of energy-related or gas-related

activity, consolidated financial statements may be filed.

4. Separate financial statements need not be filed for inactive companies or for companies engaged solely in the ownership of

interests in energy-related or gas-related companies.

B. Exhibits

1. Copies of contracts required to be provided by Item 3 shall be filed as exhibits.

2. A certificate stating that a copy of the report for the previous quarter has been filed with interested state commissions shall

be filed as an exhibit. The certificate shall provide the names and addresses of the state commissions.

SIGNATURE

[Registered Holding Company]

By: lllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll

(Name)

llllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll

(Title)

llllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll

(Date)

[FR Doc. 97–4167 Filed 2–19–97; 8:45 am]

BILLING CODE 8010–01–P