This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

9247

Vol. 66, No. 26

Wednesday, February 7, 2001

1See Holding Company Act Release No. 25757

(Mar. 8, 1993), 58 FR 13719 (Mar. 15, 1993)

(‘‘Proposing Release’’).

2The Commission continues to support

conditional repeal of the Public Utility Holding

Company Act of 1935. See PUHCA Repeal: Is the

Time Now?: Oversight Hearings Before the

Subcomm. on Finance and Hazardous Materials of

the House Comm. on Commerce, 106th Cong., 2nd

Sess. (1999) (statement of Isaac C. Hunt, Jr.,

Commissioner, SEC).

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 250 and 259

[Release No. 35–27342; International Series

Release No. 1246; File No. S7–05–01]

RIN 3235–AF78 and 3235–AF79

Foreign Utility Companies

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rule.

SUMMARY: We are reproposing and

seeking further comment on rules 55

and 56 and an amendment to rule 87

under the Public Utility Holding

Company Act of 1935. The reproposed

rules and amendment address various

issues related to the acquisition and

ownership of foreign utility companies

by registered holding companies. As a

related matter, we are requesting

comments on amendments to forms

used to report information concerning

foreign utility companies. In addition,

we are requesting comment on possible

limitations upon the ability of a holding

company to qualify foreign operations

as a foreign utility company. The

rulemaking is intended to carry out

Congress’ mandate to adopt rules

concerning acquisitions of foreign

utility companies by registered holding

companies.

DATES: Comments must be submitted on

or before April 9, 2001.

ADDRESSES: Please send three copies of

the comment letter to Jonathan G. Katz,

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609.

Comments also may be submitted

electronically at the following E-mail

address: rule-comments@sec.gov. All

comment letters should refer to File No.

S7–05–01; include this file number on

the subject line if E-mail is used.

Anyone can read and copy the comment

letters at our Public Reference Room,

450 Fifth Street, NW., Washington, DC

20549. Electronically submitted

comment letters also will be posted on

our Internet web site (http://

www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

David B. Smith, Jr., Associate Director,

at 202/942–0855 or Catherine A. Fisher,

Assistant Director, at 202/942–0545.

SUPPLEMENTARY INFORMATION: Today we

are reproposing and requesting further

public comment on proposed rules 55

and 56 (17 CFR 250.55 and 17 CFR

250.56) and an amendment to rule 87

(17 CFR 250.87) under the Public Utility

Holding Company Act of 1935 (15

U.S.C. 79a et seq.) (‘‘Holding Company

Act’’ or ‘‘Act’’).1 We are also requesting

comment on amendments to Form U–57

(17 CFR 259.207), the form used to

report a company’s status as a foreign

utility company, and Form U5S (17 CFR

259.5s), the annual reporting form for

registered holding companies. Finally,

we are seeking comment on potential

limitations on the ability of a holding

company to qualify its foreign

operations as a foreign utility company.2

Table of Contents

I. Executive Summary and Introduction

II. Background

A. The Internationalization of the Energy

Business

B. The Statutory Background

C. The Original Rule Proposal

D. Subsequent Developments

III. Proposed Rule 55

A. Preliminary Matter: Commission Review

of Specific Acquisitions and the Role of

the State Commissions

B. Conditions of Rule 55

1. Procedures and Board Review

2. Personnel Devoted to FUCOs and EWGs

3. Commission Review of Certain

Investments

4. Books and Records and Reporting

Requirements

C. Comments Received in Response to the

Concept Release

IV. Proposed Rule 56

V. Proposed Amendment to Rule 87

VI. Proposed Amendment to Form U–57

VII. General Request for Comment and

Additional Request for Comment

VIII. Regulatory Flexibility Act Certification

IX. Cost-Benefit Analysis

X. Paperwork Reduction Act

A. Rule 55

B. Rule 87

C. Form U–57

D. Form U5S

E. Form U–1

F. Rule 24

G. Request for Comment

XI. Statutory Authority

XII. Text of Proposed Rules and

Amendments

I. Executive Summary and Introduction

In 1992, Congress adopted the Energy

Policy Act of 1992 (Pub. L. 102–486, 106

Stat. 2776 (1992)). The legislation

amended the Holding Company Act to

create two new types of exempt

entities—exempt wholesale generators

(‘‘EWGs’’) and foreign utility companies

(‘‘FUCOs’’). Congress directed us to

adopt rules concerning registered

holding companies’ interests in these

entities.

In 1993, we proposed various rules as

directed by Congress. Later that same

year, we adopted the proposed rules

relating to EWGs, but not those relating

to FUCOs. Today we are reproposing

and requesting further public comment

on the rules relating to FUCOs. We are

also requesting comment on proposed

amendments to Form U–57 (17 CFR

259.207), the form used to report a

company’s status as a FUCO, and Form

U5S (17 CFR 259.5s), the annual report

form for registered holding companies.

In addition, we are requesting comment

on limitations on the ability of a holding

company to qualify its foreign

operations as a FUCO.

As originally proposed, rule 55 would

have required us to review an

acquisition if, among other things,

aggregate investment in FUCOs

exceeded 50% of the registered holding

company’s consolidated retained

earnings. The reproposed rule contains

conditions that are designed to address

the broader issues related to FUCO

investments. Reproposed rule 55

requires:

• The registered holding company to

implement review and risk-assessment

methodologies that address the risks of

FUCO investments;

• That no more than 2% of the

registered system’s domestic utility

employees render services to EWGs and

FUCOs;

• That registered holding companies

keep accurate books and records with

respect to their FUCO investments and

9248 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules

3As of December 31, 1998, holding companies

exempt under rule 2 of the Act had invested $12.3

billion in FUCOs and domestic and foreign EWGs.

On August 18, 1999, AES Corp., which recently was

granted an exemption from registration under

section 3(a)(5) of the Act in connection with its

acquisition of CILCORP Inc. (see Holding Co. Act

Release No. 27036 (Aug. 20, 1999)), announced that

it has agreed to purchase a 4,000 megawatt power

station serving England and Wales for

approximately $3.0 billion. In addition, domestic

energy companies that are not part of either a

registered or exempt holding company system have

made major investments in FUCOs and EWGs in

recent years. For example, in 1995 and 1996,

PacifiCorp, a public utility company operating in

the western United States, acquired an Australian

electric distribution company and an interest in an

Australian power plant and mine for a total of $1.7

billion. According to a U.S. Department of Energy

report, U.S. energy companies have played ‘‘a major

role * * * as investors in the reformed and

privatized electricity sectors’’ in the United

Kingdom, Australia and Argentina. See Electricity

Reform Abroad and U.S. Investment Energy

Information Administration, September 1997, at v.

4See Registered Public-Utility Holding

Companies and Internationalization, Holding Co.

Act Release No. 27110 (Dec. 14, 1999), 64 FR 71341

(Dec. 21, 1999). In the Concept Release, we noted

that, among other things, the comments received

would inform our consideration of applications and

requests for interpretive guidance concerning

foreign holding companies and our review, under

section 11 of the Act, of registration statements filed

by foreign holding companies. See Concept Release

at 71344 and infra section III.C.

Recently, we issued an order (‘‘NEES/National

Grid Order’’) approving the acquisition of New

England Electric System (‘‘NEES’’), a registered

holding company, by The National Grid Group plc

(‘‘National Grid’’), a British utility holding company

that would register under the Act, and approving

certain related transactions. See National Grid

Group plc, Holding Co. Act Release No. 27154

(March 15, 2000). On November 29, 1999, Scottish

Power plc (‘‘Scottish Power’’), also a British utility

holding company, acquired PacifiCorp, a U.S.

utility, in a transaction that was not subject to our

approval. Scottish Power has registered under the

Act. By order dated December 6, 2000, we

authorized PowerGen plc, another British utility, to

acquire LG&E Energy Corp., a U.S holding company

exempt from registration under section 3(a)(1) of the

Act.See PowerGen plc, Holding Co. Act Release No.

27291.

5See section 11 of the Act (15 U.S.C. 79k). See

also Federal Trade Commission Report to the

Senate, Utility Corporations, S. Doc. No. 92, 74th

Cong., 1st Sess. 24 (1935); Report on the Relation

of Holding Companies in Power and Gas Affecting

Control, H.R. Rep. No. 1827, 73rd Cong., 2d Sess.

(1933–1935) (documenting the circumstances that

gave rise to passage of the Act).

6Section 9(a)(1) (15 U.S.C. 79i(a)(1)) requires our

prior approval for the direct or indirect acquisition

of any securities or utility assets or any other

interest in any business by a company in a

registered system. In addition, section 9(a)(2) (15

U.S.C. 79i(a)(2)) generally requires our prior

approval for an acquisition that would result in an

extension of a holding-company system.

make these books and records available

to our staff; and

• That we and other interested

regulatory agencies receive prompt

reports of FUCO acquisitions.

In addition, proposed rule 55 requires

our prior review and approval of FUCO

acquisitions in any of the following

circumstances:

• The registered holding company’s

investment in FUCOs and EWGs

exceeds 50% of consolidated retained

earnings (or such greater amount as may

be authorized by Commission order);

• The registered holding company or

certain of its subsidiaries has

experienced recent financial weakness,

as indicated by certain bankruptcy

proceedings or declines in earnings

(conditions identical to those set forth

in rule 53(b));

• The holding company has reported

that it has obtained rate increases for

retail customers in order to recover

losses or inadequate returns on FUCO

investments; or

• Any public-utility subsidiary of the

registered holding company has a rating

from a nationally recognized statistical

rating organization with respect to its

debt securities that is less than

investment grade.

We are also proposing to amend Item

9 of Form U5S, the form on which

registered holding companies provide

information on a cumulative yearly

basis, to require the holding company to

disclose whether it has sought recovery

of losses or inadequate returns on FUCO

investments through higher rates to

system retail ratepayers.

We are also reproposing rule 56 to

clarify the status of subsidiary

companies of registered holding

companies formed to hold interests in

FUCOs. Under the proposed rule, a

registered holding company, unless

otherwise restricted (for example, by

rule 55) could acquire a subsidiary

company engaged exclusively in the

direct or indirect ownership of FUCOs

without the need to apply for, or

receive, our approval.

In addition, we are reproposing an

amendment to rule 87 to require an

order before an EWG or FUCO may

provide services to, or construction for,

or sell goods to, an associate company

(other than to an EWG, FUCO or exempt

telecommunications company). The

proposed amendment would also

require registered holding companies to

furnish state and federal regulators

copies of applications under rule 87 and

certificates under rule 24 (17 CFR

250.24).

We are also proposing an amendment

to Form U–57, which a company uses to

claim FUCO status. The amended form

would also be used to report FUCO

acquisitions, whether or not our prior

approval was required to make the

acquisitions. Registered holding

companies would be required to submit

copies of the report on Form U–57

simultaneously to us and to other

interested federal, state or local

regulators. As a consequence, we and

other interested regulators can monitor,

regulate and provide comments and

recommendations concerning the FUCO

activities of registered holding

companies.

II. Background

A. The Internationalization of the

Energy Business

The utility business is rapidly

evolving into a global industry, with

participants seeking multinational

investment opportunities. Sweeping

political and economic changes

worldwide have created a large demand

for American utility expertise and

significant investment opportunities for

United States companies. Registered

public-utility holding companies have

taken advantage of these opportunities.

As of December 31, 1998, registered

holding companies had invested $8.2

billion in FUCOs and $892 million in

domestic and foreign EWGs. Based on

publicly reported information, we

believe that investments made by

exempt holding companies, and public

utilities not part of a registered or

exempt holding company system, are

significantly higher.3 In addition,

foreign companies have acquired, or

announced their intention to acquire,

U.S. utilities and register under the Act.

These transactions, and the issues they

raise under the Act, were the subject of

a 1999 concept release (‘‘Concept

Release’’).4

Congress amended the Holding

Company Act in 1992 to facilitate these

changes. As discussed in greater detail

below, the Energy Policy Act of 1992

(‘‘Energy Policy Act’’) created new

categories of exempt entities, EWGs and

FUCOs. We were given rulemaking

authority with respect to certain matters

arising from these provisions. In view of

the increasing internationalization of

the power industry and developments

since the enactment of the Energy Policy

Act, we are reproposing rules related to

FUCO investments and requesting

comment on international issues.

B. The Statutory Background

The Holding Company Act was

enacted in the wake of widespread fraud

and mismanagement by large and farflung public-utility holding companies.

The Holding Company Act generally

requires that a holding company limit

its operations to a group of related

operating utility properties within a

confined geographic region.5 To ensure

that these standards are met, the Act

generally requires our prior approval for

public-utility company acquisitions.6

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules 9249

7Section 32 defines an EWG, in pertinent part, as

any person determined by the Federal Energy

Regulatory Commission to be engaged, directly or

indirectly, in the business of owning or operating,

or owning and operating, all or part of one or more

eligible facilities and selling electric energy at

wholesale. Section 32(a)(1) (15 U.S.C. 79z–5a(a)(1)).

The term ‘‘eligible facility’’ generally includes any

facility, wherever located, that is used for the

generation of electric energy exclusively at

wholesale. Section 32(a)(2) (15 U.S.C. 79z–5a(a)(2)).

An EWG that owns a facility located in a foreign

country may make retail sales if none of the energy

produced by the facility is sold to consumers in the

United States. Section 32(b) (15 U.S.C. 79z–5a(b)).

Section 33 defines a FUCO as a company that

owns or operates facilities that are not located in

any State and that are used for the generation,

transmission, or distribution of electric energy for

sale or the distribution at retail of natural or

manufactured gas for heat, light or power. The

definition further requires that a company derive no

part of its income, directly or indirectly, from such

utility operations within the United States, and that

neither the company nor any of its subsidiaries is

a public-utility company operating in the United

States. Section 33(a)(3)(A) (15 U.S.C. 79z–

5b(a)(3)(A)).

8Sections 32(e) and 32(g) of the Act.

9Section 33(c)(1) directs us to adopt rules

concerning registered holding companies’

acquisition of interests in FUCOs.

10See, e.g., statement of Sen. Wallop, Cong. Rec.

S17615 (Oct. 8, 1992) (section 32 is intended to

‘‘streamline and minimize’’ federal regulation);

statement of Sen. Riegle, Cong. Rec. S17629 (Oct.

8, 1992) (‘‘the purpose of section 33 is to facilitate

foreign investment, not burden it.’’). The Concept

Release discusses the possible implications of

section 33 for foreign companies investing in the

United States; the NEES/National Grid Order

discusses certain issues under the Act with respect

to the acquisition of domestic utilities by foreign

holding companies, including the application of

section 33 to these transactions. See supra note 3.

11The legislation seeks to ‘‘carefully strik(e) a

balance between the concerns of many who are

affected by its provisions, namely consumers,

ratepayers, municipals, industrials, utility

companies and State and Federal regulators.’’

Statement of Rep. Dingell, Cong. Rec. H11428 (Oct.

5, 1992).

12See Proposing Release, supra note 1. This

tension is also reflected in the debates over the

Energy Policy Act. Compare statement of Sen.

Riegle, 138 Cong. Rec. S17629 (Oct. 8, 1992)

(‘‘There are immediate and fleeting market

opportunities for U.S. companies * * * We do not

want Government barriers to these historic

opportunities * * * The purpose of section 33 is

to facilitate foreign investment, not burden it.’’)

with statements of Rep. Markey, 138 Cong. Rec.

H11446 (Oct. 5, 1992) (‘‘I am very concerned that

utilities will make unwise investments in foreign

utility systems with great potential risk to their

asset base, and in turn to their ratepayers—

residential, commercial, and industrial * * *. This

provision would invite utilities to shift valuable

resources and management—paid for by captive

retail ratepayers—from monopoly markets to

competitive markets. Utility expansion into new

markets raises the same problems as does utility

diversification in general: Risk of failure,

diversification of utility profits from measures

which would strengthen the utility’s financial

condition, reduced utility maintenance, the

draining of top management from the core utility,

and cross-subsidization.’’).

13See Proposing Release, supra note 1. In the

Proposing Release, we proposed rules 53, 54, 55, 56

and 57.

14See Holding Co. Act Release No. 25886 (Sept.

23, 1993), 58 FR 51488 (Oct. 1, 1993) (‘‘Adopting

Release’’). In the Adopting Release, we adopted

rules 53, 54 and 57.

15The ability to rely upon the safe harbor

precludes a determination by us under section

32(h)(3) of the Act (15 U.S.C. 79z–5a(h)(3)) that the

issuance and sale of securities in proposed EWG

financings ‘‘(are) not reasonably adapted to the

earning power of (the registered holding company)

or to the security structure of (the registered holding

company) and other companies in the same holding

company system, or that the circumstances are such

as to constitute the making of (a guarantee involved

in the proposed EWG financings) an improper risk

for the (registered holding company).’’

When the Act was passed over sixty

years ago, Congress believed that these

constraints were necessary to protect the

public interest and the interests of

investors and consumers.

Congress in 1935 did not foresee the

changes that have taken place in recent

years. Federal legislation enacted in the

late 1970s and early 1990s opened the

wholesale power-generation sector of

the electric industry to competition.

Half of the states are in the process of

implementing measures to increase

competition in retail markets. More and

more utilities are moving toward

disaggregation of vertically integrated

operations in favor of focusing on one

component of the utility business, such

as transmission or distribution. In

addition, sweeping political and

economic changes worldwide have

created a large demand for American

utility expertise and significant

investment opportunities for United

States companies. Finally, the utility

business is rapidly evolving into a

global industry, with participants

seeking multinational investment

opportunities.

Congress recognized these changes in

enacting Title VII of the Energy Policy

Act. The Energy Policy Act was

designed to address the constraints

imposed by the Holding Company Act

on investments by public-utility holding

companies in certain types of power

facilities. To this end, the Energy Policy

Act added two new sections to the

Holding Company Act: Section 32,

relating to EWGs and section 33,

relating to FUCOs.7 An EWG, which

may be either foreign or domestic, is

exempt from all provisions of the Act,

and may be acquired by a registered

holding company without our prior

approval.8 A FUCO is ‘‘exempt from all

of the provisions of (the) Act, except as

otherwise provided under (section

33(c)) * * *.’’ and may be freely

acquired by a registered holding

company pending the adoption of rules

under section 33(c)(1) concerning these

acquisitions.9 Sections 32 and 33 of the

Act reduced the barriers provided by the

Act to the participation of domestic

companies in independent power

production and foreign utility

investment, activities to which the Act

previously raised significant barriers.10

In amending the Act to accommodate

EWG and FUCO investments, Congress

pursued another goal—the protection of

domestic ratepayers.11 In this regard, the

legislation gives state regulators

significant responsibility for the

protection of consumers of domestic

utilities. The Commission, however, is

given primary responsibility to shield

the consumers of registered holding

companies from any adverse effects of

EWG and FUCO investments.

We have noted that there is an

inherent tension between the drive

toward a competitive energy market and

the demand for effective consumer

protection.12 Congress gave us the

responsibility to strike an appropriate

balance between the statutory goals

embodied in sections 32 and 33.

Under the Energy Policy Act, we

continue to have jurisdiction over

financing transactions related to EWG

and FUCO acquisitions. The legislation

required us to adopt regulations

concerning EWG financings within six

months of the date of enactment of the

legislation. Congress also directed us to

adopt rules with respect to FUCO

acquisitions to address the protection of

customers of the domestic operating

companies of registered holding

companies and the financial integrity of

registered systems.

C. The Original Rule Proposal

We initially proposed rules 55 and 56

in 1993 as part of a comprehensive set

of regulations intended to implement

sections 32 and 33 of the Holding

Company Act, which were added by the

Energy Policy Act.13 The rules were, by

conception and design, linked.

Proposed rule 55, addressing FUCO

acquisitions, incorporated the

conditions of rule 53, addressing EWG

financings. It is therefore important to

discuss the operation of rule 53, which

was adopted in 1993,14 as background to

the approach of rule 55.

Rule 53 sets forth two means by

which a registered holding company

may obtain approval of a proposed

financing that will be used to invest in

EWGs. The first is a partial ‘‘safe

harbor.’’ Rule 53(a) creates a partial safe

harbor by describing the circumstances

in which a financing will be deemed not

to have a substantial adverse impact on

system financial integrity within the

meaning of section 32(h)(3).15 To rely

upon the safe harbor, a registered

holding company’s aggregate

investments in EWGs and FUCOs

cannot exceed 50% of the system’s

9250 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules

16Rule 53(a)(1)(i) (17 CFR 250.53(a)(1)(i)) defines

‘‘aggregate investment’’ as all amounts invested, or

committed to be invested, in EWGs and FUCOs, 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 EWG or a FUCO, and the fair

market value of assets acquired by an EWG or a

FUCO from a system company (other than an EWG

or a FUCO).

‘‘Consolidated retained earnings’’ are defined as

the average of the consolidated retained earnings of

the registered holding company system as reported

for the four most recent quarterly periods on the

holding company’s Form 10–K (17 CFR 249.310) or

10–Q (17 CFR 249.308a) filed under the Securities

Exchange Act of 1934.

17Under rule 53(b) (17 CFR 250.53(b)), the safe

harbor is unavailable if:

(1) The registered holding company, or any

subsidiary company having assets with book value

exceeding an amount equal to 10% or more of

consolidated retained earnings, has been the subject

of a bankruptcy or similar proceeding, unless a plan

of reorganization has been confirmed in the

proceeding; or

(2) The average consolidated retained earnings for

the four most recent quarterly periods have

decreased by 10% from the average for the previous

four quarterly periods and the aggregate investment

in EWGs and foreign utility companies exceeds two

percent of total capital invested in utility

operations; provided, this restriction will cease to

apply once consolidated retained earnings have

returned to their pre-loss level; or

(3) In the previous fiscal year, the registered

holding company reported operating losses

attributable to its direct or indirect investments in

EWGs and foreign utility companies, and the losses

exceed an amount equal to 5% of consolidated

retained earnings.

18See rule 53(c) (17 CFR 250.53(c)).

19American Electric Power Co., Inc. (‘‘AEP’’);

Central and South West Corporation (’’CSW’’);

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

Consolidated Natural Gas co. (‘‘CNG’’); Eastern

Utilities Associates (‘‘EUA’’); Entergy Corporation

(‘‘Entergy’’); General Public Utilities Corporation

(‘‘GPU’’); Northeast Utilities (‘‘Northeast’’); and The

Southern Company (‘‘Southern’’). Citations to a

particular comment letter will be in the form of

[commenting party’s abbreviated name] at [page

number]. For example, a citation to page 3 of the

comment letter of AEP would be ‘‘AEP at 3.’’

Comments we received on the Proposing Release

may be found in File No. S7–9–93.

20Alabama Public Service Commission

(‘‘Alabama Commission’’); Arkansas Public Service

Commission (‘‘Arkansas Commission’’); Florida

Public Service Commission (‘‘Florida

Commission’’); Iowa Utilities Board; Council of the

City of New Orleans and the Mississippi Public

Service Commission (‘‘City of New Orleans’’);

Pennsylvania Public Service Commission

(‘‘Pennsylvania Commission’’); and Public Utility

Commission of Texas (‘‘Texas Commission’’).

21We received comments from Chairman Donald

W. Riegle, Jr. of the Senate Committee on Banking,

Housing and Urban Affairs, Senator Dale Bumpers,

and Chairman Edward J. Markey of the House

Subcommittee on Telecommunications and

Finance. In addition, we received comments from

Baker & Botts, L.L.P.; catalyst Old River

Hydroelectric Ltd. Partnership; Dewey Ballantine;

Edison Electric Institute (‘‘EEI’’); The Electricity

Consumers Resource Council, the American Iron

and Steel Institute and the Chemical Manufacturers

Association (collectively, the ‘‘ECRC’’); K&M

Engineering & Consulting Corporation; and Morgan

Stanley & Co., Inc.

22See supra note 11.

23See City of New Orleans at 9 (‘‘Congress * * *

intended that all foreign utility company

acquisition be routinely subjected to SEC preapproval’’).

In his comments, Senator Bumpers also stated

that ‘‘Congress did not intend for a safe harbor

approach to apply to holding company investments

in foreign utility companies.’’ In support of this

assertion, Senator Bumpers explained that when he

objected to the inclusion of section 33 in the final

bill, proponents of the legislation assured him that

‘‘state utility commissions would be able to provide

their comments to the SEC on individual foreign

investments proposed by registered holding

companies.’’ Sen. Bumpers at 1–2.

24 ‘‘Generally, the consumer protection afforded

by the [SEC’s] proposed rulemaking is adequate and

not unduly burdensome. The Pennsylvania

Commission has adequate rules to regulate its

jurisdictional utilities and, in turn, protect its

domestic ratepayers.’’ Pennsylvania Commission at

1.

25The City of New Orleans and the Texas

Commission proposed limiting investment in any

one foreign country to 10% of consolidated retained

earnings, as a measure to diversify risk. City of New

Orleans at 24; Texas Commission at 3.

26See Adopting Release, supra note 14. Unlike

section 32, section 33 did not establish a date by

which the Commission must promulgate rules

regarding FUCOs.

27See Southern Co., Holding co. Act Release Nos.

26501 (Apr. 1, 1996) (order) and 26646 (Jan. 15,

1997) (denying request for reconsideration), aff’d,

Campaign for a Prosperous Georgia v. SEC, 149 F.3d

1282 (11th Cir. 1998); Central and South West

Corp., Holding Co. Act Release No. 26653 (Jan. 24,

1997); GPU, Inc., Holding Co. Act Release Nos.

26773 (Nov. 5, 1997) (order) and 26779 (Nov. 17,

1997) (opinion); Cinergy Corp., Holding Co. Act

Release no. 26848 (Mar. 23, 1998); American

Electric Power Co., Inc., Holding Co. Act Release

No. 26864 (Apr. 27, 1998); New Century Energies,

Inc., Holding Co. Act Release No. 26982 (Feb. 26,

1999).

consolidated retained earnings (‘‘50%

CRE Requirement’’).16 In addition, no

more than 2% of the system’s domestic

utility employees can render services to

EWGs and FUCOs, and the registered

holding company must give us

reasonable access to the books and

records of these entities, and provide

copies of filings under the rule to other

interested regulators.

The financing safe harbor is not

available if the conditions of rule 53(a)

are not satisfied or if certain specified

financial events have occurred, such as

an event of bankruptcy or other

evidence of financial or operating

problems.17 To obtain approval in this

circumstance, a registered holding

company must demonstrate that the

proposed financing will not have

substantial adverse impact upon system

financial integrity and that the

transaction will have no adverse impact

on any utility subsidiary or its

customers, or on the ability of state

commissions to protect that subsidiary

or customers.18

Proposed rule 55 described the

conditions under which a registered

holding company could acquire an

interest in a FUCO without the need to

apply for, or receive, prior approval.

Proposed rule 55 incorporated the

conditions of rule 53. If the conditions

were met, a registered holding company

could acquire a FUCO without our

approval.

Proposed rule 55 proved

controversial. We received comments

from registered holding companies,19

state and local regulators,20 and other

interested parties, including the

National Association of Regulatory

Utility Commissioners (‘‘NARUC’’), the

United States Departments of Energy

and State, and several members of

Congress.21 The opposing views of the

commenters generally reflected the

tension in the legislation between the

drive toward a competitive energy

market and the demand for effective

consumer protection.22 On the one

hand, regulated companies emphasized

the need for flexibility to respond to

historic, and fleeting, opportunities

available as the utility industry worldwide undergoes a fundamental

reorganization. On the other hand,

consumer advocates urged caution,

voicing concerns about possible

detriment to captive utility ratepayers.

A number of commenters asserted that

the statute requires us to review each

FUCO acquisition.23

Opinion among state regulators was

also divided. Some state regulators,

such as the Pennsylvania Commission,

found the rules as proposed to be

adequate.24 Others suggested that they

be more restrictive.25

Many commenters suggested that we

request further comment upon the rule

55. In light of the comments and upon

our own review of the matter, we

decided to give additional consideration

to the issues raised by proposed rule

55.26

D. Subsequent Developments

Since the proposal of rule 55 in 1993,

we have gained significant experience

in addressing FUCO investments.

Specifically, as of December 31, 1999,

we had authorized six registered

holding companies to finance FUCO

and EWG acquisitions in an amount

equal to 100% of their consolidated

retained earnings (‘‘100% Orders’’).27 In

considering these applications, we have

had an opportunity to consider the ways

in which registered holding companies

go about identifying and making FUCO

investments. We also now have the

benefit of reviewing the experience that

registered holding companies have had

with respect to their FUCO investments.

Based on this experience, as well as the

comments on proposed rule 55 and the

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules 9251

28We are also addressing issues raised by

significant FUCO ownership by foreign and

domestic registered holding companies. See section

VII, infra.

29See supra note 23. In addition, the ECRC, for

example, voiced concern that ‘‘safe harbors will not

adequately protect U.S. electricity consumers

against the hazards of [registered holding company]

investment in foreign utilities and EWGs.’’ NARUC

suggested that companies seeking to come within a

safe harbor should be required to file an application

and serve each affected state and local utility

commission; any affected state could then file a

notice of adverse impact that would make the safe

harbor unavailable. The Department of Energy

suggested a procedure under which state

commissions could file comments with us.

30AEP at 6–7; CNG at 2–3; Entergy at 22; GPU

at 13; Northeast at 11–12; and the Department of

Energy at 13–14.

31Southern Co., Holding Co. Act Release No.

26501, citing the Proposing Release, supra note 1.

32We have noted in our 100% Orders that ‘‘(a)s

a practical matter, * * * it may not be feasible to

insulate the operating companies completely from

a potential increase in cost of capital that could

result from a major loss in connection with these

investments.’’ See, e.g., Southern Co., supra note

27.

33Section 33(c)(1), by its terms, does not

contemplate the participation of state ratemaking

authorities. Although the legislative history is silent

on the point, it seems that Congress may have

envisaged, at most, an advisory role for state

regulators with respect to FUCO acquisitions and

financings for purposes of acquiring interests in

FUCOs by registered holding companies. Section

33(c)(1) (15 U.S.C. 79z–5b(c)(1)), for example,

expressly requires us to ‘‘reasonably and fully

consider’’ the recommendation of an interested

state commission regarding the registered holding

company’s relationship to a FUCO.

34 Department of Energy at 13–14. Many of the

registered companies agreed. See AEP at 6–7

(‘‘although risk does vary from project to project

and from country to country, such risks will be

reflected in the company’s analysis of the pricing

and other negotiated terms of the transaction’’);

CNG at 3 (‘‘It can be reasonably assumed that the

(registered holding companies) would * * * see to

adequate safety in the construction and operations

of EWGs and foreign utility companies in which

they invest.’’); GPU at 13; Northeast at 11–12.

Southern described the factors it assesses prior to

investing in a foreign project. These factors include

political and financial stability, the compatibility of

business practices and customs, legal systems, the

availability of political insurance and currency risk

Continued

Concept Release, we are reproposing the

rule.28

III. Proposed Rule 55

A. Preliminary Matter: Commission

Review of Specific Acquisitions and the

Role of State Commissions

One of the most controversial issues

was whether rule 55 should require us

to review each FUCO acquisition. On

the one hand, several commenters

asserted that our rules should require

that FUCO investments be approved on

a case-by-case basis, either by us or by

state regulators.29 On the other hand,

many commenters stated that a case-bycase review would be impractical and

inconsistent with the statutory purpose

to facilitate investments in FUCOs.

These commenters expressed concern

that requiring case-by-case approval

‘‘would be so complex and timeconsuming that it would render the

affected companies unable to react to

market conditions in a timely fashion,’’

and, as a result, ‘‘these companies

would be unable to take advantage of

the investment opportunities that

Congress, when it adopted the subject of

new legislation, meant them to be able

to pursue.’’30

Having carefully considered the

comments, and based on our

experience, we continue to believe that

a requirement that we approve each

individual FUCO acquisition would

undercut the purpose of section 33. We

believe, however, that rule 55 should

incorporate conditions that balance the

registered holding companies’ need for

flexibility and their domestic

consumers’ need for protection against

potential detriment from FUCO

investments.

In our 100% Orders, we have focused

on the preservation of capital for

domestic utility operations, the effect of

FUCO investments upon the daily

operations of the domestic utility

subsidiaries, and the possible effect of

these investments upon domestic

ratepayers. We have stated that

‘‘[a]lthough foreign utility operations

raise unique issues for the

administration of the Act, we believe

that the relevant considerations are

generally those identified in section

32(h)(6), relating to the preservation of

capital for domestic utility operations,

the effect of foreign utility company

investments upon the daily operations

of the domestic utility subsidiaries, and

the possible effect upon domestic

ratepayers.’’ 31 We have looked at

numerous factors, including the holding

company’s current financial health, the

percentage of total capital these

securities transactions would amount to,

the company’s debt/equity ratio, the

insulation of its operating subsidiaries

from the debt of the holding company,

the extent to which the operating

companies are dependent on infusions

of holding company capital to conduct

their operations, and the fact that the

state utility commissions with

jurisdiction over the operating

companies did not object to the

financing. Our 100% Orders require the

registered holding company to remain

in compliance with the requirements of

rule 53(a), other than the 50% CRE

Requirement, at all times during the

period of authorization of the order. The

100% Orders cease, by their terms, to be

effective if one of the disqualifying

circumstances described in rule 53(b)

occurs during the period. The registered

holding company also specifically

undertakes that it will not seek recovery

through higher rates to its utility

subsidiaries’ customers to compensate it

for any possible losses that it may

sustain on investments in EWGs and

FUCOs or for any inadequate returns on

these investments. We believe that it is

appropriate to include similar

requirements in proposed rule 55.32 The

reproposed rule does not, and cannot,

provide absolute certainty against any

potential detriment from FUCO

acquisitions.

In this regard, we have given

particular consideration to the urging of

NARUC and other commenters that the

rule be amended to include a role for

state and local regulators. Our practice

in granting the 100% Orders has

demonstrated that state commissions

have played a significant consultative

role in matters relating to FUCO

investments. In each of the 100%

Orders, the relevant state commissions

have provided us with letters stating

that the order would not impair the

ability of the state commission to

regulate the holding company’s

domestic utilities or protect the utilities’

customers. These views have been

helpful to our decisions in these

matters. We contemplate that state

regulators will play a similar role in

those instances where rule 55 requires

our approval of FUCO acquisitions. We

request comment whether this approach

strikes the appropriate balance in

addressing the competing concerns

reflected in section 33.33

B. Conditions of Rule 55

1. Procedures and Board Review

We have frequently noted that

investments in FUCOs pose risks that do

not arise in the domestic utility

industry. Foreign investment and

commercial activities entail countryspecific risks related to political and

economic conditions. It is important to

a holding company system’s financial

integrity that these risks be analyzed

and addressed in a systematic way.

In commenting on proposed rule 55,

the Department of Energy stated that

assessment of risk is ‘‘the proper

function of utility management, not

regulatory agencies. * * * The SEC can

provide adequate protection to domestic

consumers and investors by establishing

the regulations proposed in this

rulemaking and by aggressively

overseeing transactions and contractual

arrangements between registered

holding companies and their foreign

utility subsidiaries.’’34

9252 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules

protection, as well as an evaluation of risk balanced

against projected returns. Southern at 15–16.

35 In the applications relating to the 100% Orders,

registered holding companies have suggested that

they take a number of measures to meet these

objectives. For example, applicants have

represented that they seek local partners (including

government agencies) or obtain ‘‘political risk’’

insurance to reduce the risks of expropriation,

reduce construction risks through performance

guarantees, and seek financing that is non-recourse

to the holding company. The registered holding

companies have also represented that they take a

number of measures to address foreign currency

risks.

36Proposed rule 55(a)(3).

37 ‘‘The SEC has appropriate discretion in

considering the issues and promulgating the

regulations to take the steps reasonably necessary

to protect operating companies and their

customers.’’ Statement of Sen. Wallop, 138 Cong.

Rec. S17615 (Oct. 8, 1992).

38See section 1(b)(2) (15 U.S.C. 79a(b)(2)).

39See, e.g., Statement of Rep. Markey, 138 Cong.

Rec. H11446 (Oct. 5, 1992).

40 If, for example, a holding company has

received a 100% Order, the percentage would be

100%.

41At the time of the filing of the bankruptcy

petition, the subsidiary must have had assets with

a book value exceeding an amount equal to 10% or

more of the holding company’s consolidated

retained earnings. See rule 55(b)(1)(i).

42 15 U.S.C. 79e(c). Item 9 of Form U5S requires

the reporting of information concerning EWGs and

FUCOs.

This observation is borne out by our

experience with the 100% Orders. In

requesting 100% Orders, applicants

have emphasized the role in FUCO

investments of procedures designed to

analyze risks. These types of procedures

cannot assure that all FUCO

investments will be profitable. They are

designed to assure that risks are fully

analyzed by corporate personnel and

their advisers and that appropriate riskmitigation measures are implemented.

The proposed rule therefore

incorporates a condition designed to

assure that the risks of FUCO

investments are thoroughly analyzed

and addressed. The board of directors of

the registered holding company would

be required to adopt procedures

designed to analyze the risks of

investing in foreign jurisdictions. These

risks include developing, constructing

and operating utility facilities abroad

and the related political, legal and

financial, and foreign currency risks.

While the proposed rule identifies

certain risks that should be addressed,

the list is not intended to be exhaustive.

Nor does the rule mandate specific

procedures. A number of commenters

emphasized the difficulty of developing

uniform standards to address such

diverse and complex issues as sovereign

risk, currency fluctuation, repatriation

of earnings, political stability, potential

tort liability and adequacy of local

safety standards and regulatory

oversight. Holding companies would be

expected to develop procedures based

on the particular circumstances of the

holding company and the anticipated

investments.

The proposed rule also requires that

specific FUCO acquisitions be approved

by the holding company’s board of

directors. The board’s approval would

be based upon, among other things,

findings that the FUCO investment

procedures have been complied with;

that measures have been, or will be,

taken to mitigate the risks that the

FUCO acquisition presents to the

holding company and its associate

companies; and that the FUCO

acquisition and any related financing

have been structured such that

ratepayers of the holding company’s

associate companies are adequately

insulated from any adverse effects of the

FUCO investment.35

Copies of the procedures, the board

resolutions, and any documents that

serve as a basis for the board findings

would be required to be preserved in the

holding company’s books and records.

This will enable our inspection staff to

determine whether appropriate

procedures have been effectively

implemented.

We request comment on the proposed

approach. Should the rule require

boards of directors to make additional

findings concerning specific issues?

Should the rule require certain legal and

other expert opinions to serve as the

basis of the findings? Should the rule

specify additional procedures?

2. Personnel Devoted to FUCOs and

EWGs

Proposed rule 55 also provides that no

more than 2% of the system’s domestic

utility employees can render services to

EWGs and FUCOs.36 Rule 53 contains

the same requirement. We believe that

this provision offers a further safeguard

for the utility operations of the

registered system.37 Diversion of

expertise from the system’s core

business is a basic concern of the Act.38

This same concern reappears in the

legislative history of the Energy Policy

Act.39

3. Commission Review of Certain

Investments

It may be appropriate for us to review

FUCO acquisitions if the holding

company’s investments in FUCOs

exceed certain levels or if the holding

company has experienced recent

financial weakness. In these

circumstances, the proposed rule

requires the holding company to

demonstrate that the acquisition will

not have a substantial adverse impact

upon system financial integrity or upon

any system utility, its customers, or the

State commission’s ability to protect the

utility or its customers. We believe that

the approach of rule 53(c), which

defines the circumstances where rule

53’s safe harbor is not available, are also

appropriate to define the circumstances

under which our review of a transaction

is appropriate.

The proposed rule would require our

review when:

• The registered holding company’s

investment in FUCOs and EWGs

exceeds 50% of consolidated retained

earnings (or such greater amount as may

be authorized by Commission order); 40

• The registered holding company or

certain of its subsidiaries (‘‘Significant

Subsidiaries’’) has been the subject of a

bankruptcy or similar proceeding,

unless a plan of reorganization has been

confirmed in the proceeding; 41

• The average consolidated retained

earnings for the four most recent

quarterly periods have decreased by

10% from the average for the previous

four quarterly periods and the aggregate

investment in EWGs and FUCOs

exceeds two percent of total capital

invested in utility operations; or

• In its previous fiscal year, the

registered holding company reported

operating losses attributable to its direct

or indirect investments in EWGs and

FUCOs, and these losses exceed an

amount equal to 5% of consolidated

retained earnings.

We are also proposing two additional

circumstances that would trigger the

transaction review requirement:

• The holding company has sought

recovery of losses or inadequate returns

on FUCO investments through higher

rates to retail ratepayers.

In the 100% Orders, holding

companies have always undertaken that

they would not seek to recover losses

from ratepayers. In order to provide

greater assurance that losses, if any, are

not passed on to ratepayers, we are

proposing to amend Item 9 of Form

U5S, the form for annual reports that

registered holding companies are

required to file under section 5(c) of the

Act, to require disclosure of whether

any rate increases to retail customers

have been obtained in order to recover

these losses.42

If, during the preceding three years,

the holding company has responded to

this item in the affirmative, the

proposed rule would require our

approval of additional acquisitions.

• The securities of any Significant

Subsidiary that is a public-utility

company were rated less than

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules 9253

43 Department of State at 1–2.

44The books and records required to be kept are

those required by rule 53. A registered holding

company must maintain books and records to

identify investments in, and earnings from, any

FUCO in which it directly or indirectly holds an

interest. Rule 53 also addresses the books and

records that must be kept with respect to partially

owned FUCOs.

45See Section 18 of the Act [15 U.S.C. 79r]

(authorizing the Commission ‘‘upon its own motion

or at the request of a state commission’’ to inquire

into the business of any registered holding company

or subsidiary) (emphasis added).

46See Intrasystem Service, Sales and

Construction Contracts Involving Exempt

Wholesale Generators and Foreign Utility

Companies, Holding Co. Act Release No. 25887

(Sept. 23, 1993), 58 FR 51508 (Oct. 1, 1993), RIN

3235–AF87, File No. S7–28–93 (‘‘Rule 87 Proposing

Release’’). We proposed, and today are reproposing,

a clarifying amendment to rule 87. The rule

currently allows subsidiary companies of a

registered holding company to enter into certain

intrasystem agreements without the need to apply

for or receive our prior approval. The proposed

amendment would make clear that our approval, by

order upon application, is required for intrasystem

service, sales and construction agreements

involving an EWG or FUCO, and another subsidiary

company in the registered system, other than an

EWG or FUCO.

47See section 33(c)(2) of the Act (15 U.S.C. 79z–

5b(c)(2)).

48Section 33(c)(1) of the Act (15 U.S.C. 79z–

5b(c)(1)).

49We received letters from 30 commenters,

including state officials and regulators, the U.S.

Department of State, foreign and domestic holding

companies, consumer, trade and business

associations and individuals. These letters may be

found in File No. S7–30–99.

50NEES and National Grid place particular

emphasis on this approach. See Joint Response of

The National Grid Group plc and New England

Electric System to the Concept Release on

Registered Public Utility Holding Companies and

Internationalization in File No. S7–30–99.

51 ‘‘Grandfathering’’ excludes FUCO investments

a holding company has made prior to the time it

registers under the Act from the 50% CRE

Requirement of rule 53. Only investments made

after registration would be subject to the percentage

limitation. See supra note 16 and accompanying

text.

investment grade by a nationally

recognized statistical rating

organization.

This provision is designed to afford

an additional protection for domestic

ratepayers. The rating of the debt

securities of a public-utility subsidiary

has a direct effect on its cost of funds

and its rates. A rating of less than

investment grade suggests that we

should review FUCO acquisitions to

assure that they will not have an

adverse impact on the financial integrity

of the holding company system, which

could, in turn, lead to further rate

increases. This approach will also afford

state regulators an opportunity to

present their views concerning the

effects of FUCOs on rates.

As is the case with our 100% Orders,

our approval of each acquisition may

not be necessary. In many

circumstances, the requested

authorization may reflect the ‘‘budget

method’’ of our 100% Orders—that is,

authorization to invest a specified

amount in FUCOs. Individual review

may be appropriate, for example, when

a Significant Subsidiary of the holding

company has experienced significant

financial difficulty.

We request comment on the proposed

Commission review requirement.

Should any other events trigger the

requirement that we review FUCO

acquisitions? Should other measures be

used, such as the relation of FUCO

investments to consolidated

capitalization, consolidated assets, or

net utility plant? Should the conditions

be more restrictive? Should FUCO

investments be required to be insured

against political and exchange risks? 43

4. Books and Records and Reporting

Requirements

Proposed rule 55 requires a company

that is relying on the rule to maintain

books and records with respect to the

FUCO investment.44 The proposed rule

also requires that certain information be

provided to retail rate regulators.

Specifically, a registered holding

company that makes a FUCO

investment must, within ten days of the

investment, file a statement on Form

U–57 with us and provide a copy to

every regulator having jurisdiction over

the rates of any system utility. The

registered holding company must also

provide to the regulators other filings by

the holding company related to its

FUCOs. These filings are related to the

financing of the FUCO acquisition and

certain contractual relationships

between the FUCO and the holding

company, its affiliates or associate

companies.

The access to information made

possible by the books and records

provisions and the reporting

requirements under rule 55(d) should

help retail ratemakers to shield

consumers from the costs that may be

associated with investment in FUCOs.45

Under proposed rule 87, discussed

below, our prior approval would be

necessary for intrasystem service, sale

and construction arrangements

involving FUCOs,46 and financing

transactions and other relationships

incidental to the acquisition remain

subject to the Act.47 These measures

should help to ensure ‘‘the protection of

the customers of a public utility

company which is an associate

company of a FUCO and the

maintenance of the financial integrity of

the registered holding company

system.’’ 48

We request comment whether these

provisions (or the related provisions in

rule 53) should be modified in any

respect. For example, should the rule

permit the FUCO to keep its books and

records in conformity with local

accounting conventions (rather than

U.S. generally accepted accounting

principles, as required by certain

provisions of rule 53) if the local

accounting system permits us to

determine whether transactions between

the FUCO and the other companies in

the holding company system comply

with the Act’s standards?

C. Comments Received in Response to

the Concept Release

We received comments from a wide

range of commenters in response to the

Concept Release.49 While none of the

commenters discussed rule 55

specifically, several commented on the

operation of rule 53 and the importance

of providing safeguards to limit the

possibility that FUCO investments

would have an adverse effect on

domestic utilities, particularly the

FUCO investments of foreign registered

holding companies. One commenter

suggested that the Commission should

establish standards for the type of

businesses in which a FUCO could

engage. Several industry commenters

suggested that the safe harbor approach

should be modified to focus on the

financial condition of the holding

company, including its credit ratings,

rather than the relationship of the FUCO

investments to consolidated retained

earnings.50

We believe that the suggested

approach is not warranted at this time.

The current approach does not establish

an irrebuttable presumption concerning

the appropriate ratio of FUCO

investments to retained earnings; rather,

it establishes a point at which the

Commission can review the level of

investment and, with input from state

regulators, determine whether it is

likely to have an adverse effect on the

holding company and its public utility

subsidiaries. Rule 55 would apply

equally to foreign and domestic

registered holding companies.

Several commenters addressed the

question of whether the existing FUCO

investments of foreign registered

holding companies should be

automatically ‘‘grandfathered’’ for

purposes of rule 53.51 Most of these

commenters suggested that

grandfathering should not be automatic;

rather, they urged the Commission to

subject these investments to the type of

review required by rule 53(c). This is

the approach that we took in the NEES/

9254 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules

52See section 32(a)(1) of the Act (15 U.S.C. 79z–

5a(a)(1)), which defines EWG to include an

intermediate subsidiary that is engaged exclusively

in the business of owning or operating, or both

owning and operating, all or part of one or more

eligible facilities.

53See Rule 87 Proposing Release, supra note 46.

54Filings under rule 24 are normally made within

ten days of the consummation of a transaction, but

may be made quarterly, semiannually or annually,

as specified by the relevant order. We noted that the

filing of certificates would inform the regulators of

services rendered to EWGs and FUCOs and would

facilitate audits of system companies. Id.

55 Id. We also noted an earlier proposed

amendment to rule 83 (17 CFR 250.83). See Holding

Co. Act Release No. 25668 (Nov. 3, 1992), 57 FR

54025 (Nov. 16, 1992). The proposed amendment to

rule 83 would have allowed subsidiaries of

registered holding companies to provide services

for certain foreign associate companies without the

need for prior approval under section 13(b), so long

as the consideration to be paid by the foreign

associate company is not less than the cost of the

service, sales or construction to the subsidiary

company rendering such services. The requirement

that services be provided at not less than cost was

intended to prevent the subsidization of foreign

activities by domestic system companies. We asked

commenters to consider the proposed amendment

to rule 83 in their comments on rule 87. See Rule

87 Proposing Release, supra note 46, at note 3.

56Comments on the proposed amendment to rule

87 may be found in File No. S7–28–93.

57Allegheny Power System; AEP; Columbia;

CNG; and GPU.

58 Id.

59Northeast; Southern.

60 Joint comments by the City of New Orleans, the

Arkansas Commission and the Mississippi

Commission; joint comments by NARUC, Consumer

Federation of America and Environmental Action;

and the Ohio Office of the Consumer’s Counsel.

61See, e.g., Southern Co., Holding Company Act

Release No. 26212 (Dec. 30, 1994); Entergy Corp.,

Holding Company Act Release No. 26322 (Jun. 30,

1995); National Fuel Gas Co., Holding Company Act

Release No. 26847 (Mar. 20, 1998); Central and

South West Corp., Holding Company Act Release

No. 26887 (Jun. 19, 1998); American Electric Power

Co., Inc., Holding Company Act Release No. 26962

(Dec. 30, 1998); Cinergy Corp., Holding Company

Act Release No. 26984 (Mar. 1, 1999); Cinergy

Corp., Holding Company Act Release No. 27016

(May 4, 1999); Entergy Corp., Holding Company Act

Release No. 27039 (Jun. 22, 1999).

62See Energy Corp., Holding Company Act

Release Nos. 27040 and 27039 (Jun. 22, 1999).

National Grid Order and which is

reflected in reproposed rule 55.

IV. Proposed Rule 56

We are also reproposing rule 56.

Proposed rule 56 clarifies the status of

subsidiary companies of registered

holding companies formed to hold

interests in FUCOs. Under the rule, a

company engaged directly or indirectly,

and exclusively, in the business of

owning or operating, or both owning or

operating, all or part of one or more

FUCOs would be deemed a FUCO for

purposes of the Act, and a registered

holding company could acquire such a

company on the same terms and

conditions that it could acquire the

underlying FUCO.

Proposed rule 56 should not result in

additional risk to consumers. To the

contrary, intermediate companies

permitted by the proposed rule may

isolate risks that might be associated

with the new ventures and secure,

where possible, additional tax benefits.

The statute provides a similar

exemption for intermediate companies

formed to hold interests in EWGs.52

V. Proposed Amendment to Rule 87

Rule 87 addresses the circumstances

in which a subsidiary company of a

registered holding company may

perform services or construction for, or

sell goods to, an associate company

without the need to apply for or receive

our prior approval. Among other things,

the rule allows a subsidiary utility

company to render incidental services

to an associate company, and any

subsidiary company to ‘‘perform

services or construction for, or sell

goods to’’ an associate nonutility

company.

In 1993, we proposed an amendment

to rule 87 that was designed to make it

clear that Commission approval is

required for intrasystem agreements

involving EWGs and FUCOs.53 The

proposed amendment would also have

required registered holding companies

to furnish state and federal regulators

copies of applications under rule 87 and

certificates under rule 24.54 We noted in

the Rule 87 Proposing Release that the

amendment would allow us to monitor

services to EWGs and FUCOs to prevent

the diversion of management and goods

to these companies by other system

companies, and would ensure that

system companies are fairly reimbursed

for the use of their employees’ time or

for the provision of goods.55

Comments on the proposed rule were

mixed.56 Holding companies that

commented on the proposed rule

generally suggested that it would

impose unnecessary administrative

burdens.57 They also asserted that rule

53, which allows no more than 2% of

a holding company system’s domestic

utility personnel to render services to

affiliated FUCOs and EWGs, and section

13(b) of the Act, requiring services to be

provided at cost, protected the interests

of the holding company’s domestic

utilities.58 Two holding companies

suggested that the scope of the rule

amendment be narrowed to address

only transactions with domestic public

utilities.59

State regulators and consumer groups

supported the proposal but believed that

it was too narrow. They suggested that

the Commission establish ‘‘clear pricing

standards’’ for affiliate transactions that

would protect ratepayers. Generally,

they suggested that if the value of the

services provided to a FUCO or EWG

exceeded their cost, the utility should

be required to charge the market value;

if the utility was the purchaser of the

services, the price should be the lower

of market value or cost.

Since the proposal of the amendments

to rule 87, registered holding companies

have generally sought our approval of

intrasystem agreements involving EWGs

and FUCOs.61 In addition, our staff has

found, in its examinations of holding

company systems, that transactions

between service companies and FUCOs

have adhered to the Act’s standards.

While this experience suggests that

the amendment may be unnecessary, we

are nevertheless reproposing it in view

of the comments of state regulators and

consumer groups. These commenters

suggested that they would benefit from

receiving applications related to these

transactions, as well as the filings under

rule 24.

We are not proposing to incorporate

substantive standards for transactions

between FUCOs or EWGs and system

utilities into the rule. We continue to

believe that variations from the ‘‘at cost’’

standards of section 13(b) are best

addressed on a case-by-case basis. We

note that we have recently granted an

exemption from the ‘‘at cost’’ standard

for certain types of transactions with

FUCOs.62 We will continue to be

flexible in addressing such requests

particularly where they are supported

by state regulators and are designed to

assure that captive ratepayers do not

subsidize FUCO investments.

VI. Proposed Amendment to Form U–57

In the Proposing Release, we

requested comment on a new form

(Form U–57), which we adopted in the

Adopting Release. Form U–57 is

currently used by companies claiming

FUCO status. We now propose

amending Form U–57 so that it may be

used by both companies claiming FUCO

status as well as registered holding

companies reporting the acquisition of a

FUCO under rule 55. The FUCO and the

holding company could file a single

form, thus avoiding duplicative filings.

Form U–57, as proposed to be

amended, contains four items.

• Item 1 requires a description of

each FUCO acquired, its location and

business address, and the facilities used

for the generation, transmission and

distribution of electric energy for sale or

for the distribution at retail of natural or

manufactured gas. It further requires

identification of each system company

that holds an interest in the FUCO and,

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules 9255

63 Item 9 of Form U5S requires the reporting of

information concerning EWGs and FUCOs.

to the extent known, each person that

holds five percent or more of any class

of voting securities of the FUCO.

• Item 2 requires a statement of the

purchase price paid for the FUCO; the

type and amount of capital invested,

directly or indirectly, in the FUCO; any

debt or other financial obligation for

which there is recourse to a system

company (other than an EWG or FUCO);

and any direct or indirect guarantee of

a security of the FUCO.

• Item 3 requires the identification of

each domestic associate public-utility

company and, if applicable, its holding

company.

• Item 4 requires the identification of

the location of the books and records

required by rule 53 and provides that a

registered holding company, by filing

the form, undertakes that it will provide

us or our representatives with access to

these books and records in the United

States, at a location that we may

reasonably request.

The amended form should provide us

and state and local regulators with

timely notice of all FUCO acquisitions

made in reliance on rule 55 and much

of the same information, on a

transactional basis, that registered

holding companies are required to

provide us on a cumulative yearly basis

in Item 9 of Form U5S. Access to

information concerning these

investments as they are made will

enhance our ability, as well as the

ability of the state commissions, to

monitor, regulate, and in the case of

state regulators, provide us comments

and recommendations concerning the

foreign utility activities of registered

holding companies.

VII. General Request for Comment and

Request for Additional Comment

The Commission requests comment

on the new rules, rule amendment, and

form amendments proposed in this

release, suggestions for additional

provisions or changes to existing rules

or forms, and comments on other

matters that might have an effect on the

proposals contained in this release. We

also request information regarding the

potential effect of the proposals on the

U.S. economy on an annual basis.

Commenters are requested to provide

empirical data to support their views.

We are also seeking additional

comment on the advisability of possible

limitations upon the ability of a holding

company to qualify its foreign

operations as a FUCO. In the NEES/

National Grid Order, we determined

that it was appropriate for a U.K. publicutility holding company to qualify its

foreign businesses as a FUCO. This

status allowed the U.K. holding

company to acquire a U.S. registered

holding company without regard to the

integration provisions of the Act. We

determined that treating the foreign

businesses as a FUCO would not

undermine the policies of the Act or be

detrimental to the protected interests.

We also noted in the NEES/National

Grid Order that, in addition to its

foreign utility operations, National Grid

holds various nonutility businesses of a

type that we or Congress has found to

satisfy the standards of section 11(b)(1)

of the Act.

Since the date of the NEES/National

Grid Order, various foreign holding

companies have sought the advice of

our staff concerning the qualification of

their existing businesses as a FUCO for

purposes of making a U.S. utility

acquisition. Some of these holding

companies have been agencies of foreign

sovereign states; others have been

foreign conglomerates. We are seeking

public comment about whether the

foreign business activities of these

holding companies and their ownership

and corporate structure could pose risks

to the protected interests under the Act.

Should certain circumstances or

business activities or the scope and size

of those activities preclude a claim of

FUCO status? What standards should

we adopt to reflect the considerations

involved when an acquiror is controlled

by a foreign sovereign, is highly

diversified and/or engages in diversified

activities that are significantly larger

than the utility operations? We note that

these standards may be as appropriate

for a domestic holding company as for

a foreign one.

VIII. Regulatory Flexibility Act

Certification

The proposed rules and amendments

will not affect any small entities as

defined in rule 110. Pursuant to section

605(b) of the Regulatory Flexibility Act

(5 U.S.C. 605(b)), our Chairman has

certified that the proposed rules and

amendments will not, if adopted, have

a significant economic impact on a

substantial number of small entities. A

copy of this certification is attached as

Appendix A. We encourage written

comments on the certification.

Commenters are asked to describe the

nature of any impact on small entities

and provide empirical data to support

the extent of the impact.

IX. Cost-Benefit Analysis

Benefits

Proposed Rule 55; Proposed

Amendments to Forms U–57 and U5S.

As discussed in section II.B. above,

Congress directed us to adopt rules with

respect to FUCO acquisitions to address

the protection of customers of the

domestic operating companies of

registered holding companies and the

financial integrity of registered systems.

We are reproposing rules 55 and 56

under this directive.

Rule 55 will benefit investors and

ratepayers of registered holding

companies by ensuring that FUCO

investments are undertaken with

requisite prudence, while relieving

companies of the burden of seeking a

Commission order to make FUCO

investments when proper safeguards are

in place. The benefits afforded by the

rule are not possible to quantify. The

reporting of all FUCO investments is

required by the rule; however, registered

holding companies meeting rule 55(a)’s

requirements with respect to their

acquisitions of FUCOs will be granted a

complete safe harbor from Commission

review, thus obviating the need to file

a Form U–1 (17 CFR 259.101) in

connection with the acquisition and the

costs associated with the filing.

Further, we believe that rule 55, as

well as rule 56, discussed below, will

benefit registered holding companies by

placing them on more equal footing

with other entities (e.g., utilities and

utility holding companies not subject to

the Holding Company Act) that make

investments in foreign energy projects.

By giving them the ability to make these

investments without our prior review or

approval under certain circumstances,

and by facilitating their use of

intermediate subsidiaries to make these

investments, the proposed rules will

provide registered holding companies

with greater flexibility and fewer

administrative burdens.

The proposed amendment to Form

U5S requires that registered holding

companies report, in response to Item 9

of the form,63 when rate increases for

retail customers have been obtained in

order to recover losses or inadequate

returns on FUCO investments. Likewise,

the proposed amendment to Form U–57,

which designates the form as the means

of reporting all FUCO investments

under proposed rule 55(d), requires

disclosure to regulators and the public

regarding the nature of specific overseas

investments. In conjunction with the

reporting and dissemination

requirements of proposed rule 55(d), the

proposed form amendments will assist

state and federal regulators in protecting

ratepayers by notifying regulators soon

after a holding company makes a FUCO

investment and by alerting them to any

adverse impact of FUCO investments on

9256 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules

64See supra note 11 and accompanying text. 65For example, although rule 53(a)(3) requires

Commission approval before a registered holding

company system’s domestic utility personnel can

render services to EWGs and FUCOs in which the

registered holding company holds an interest, we

are concerned that this requirement could be

evaded by means of rule 87. See Rule 87 Proposing

Release, supra note 45, at note 5 and accompanying

text.

66See supra note 55.

67We note that the actual cost of complying with

the rule, particularly rule 55(a)(1), could be

significantly higher for companies that utilize the

assistance of third parties in determining whether

to make a FUCO investment. We also recognize that

registered holding companies consider making

FUCO investments, and incur costs assessing the

potential risks and returns on these ventures, that

they ultimately determine not to pursue. Therefore,

we believe there are significant costs associated

with potential foreign ventures that do not result in

actual investments.

68As of December 31, 1998, 11 of the 18 active

registered holding companies had FUCO

investments and seven had no FUCO investments.

Of the 11 with FUCO investments, six had been

issued 100% Orders.

69For example, if a registered holding company

has received a 100% Order and that order is still

effective, then the requirements of paragraph (b)

would not apply. Rather, the company would

comply with the conditions of the 100% Order and

the other provisions of rule 55 in order to make the

FUCO investment without further Commission

authorization.

70This amount assumes that a registered holding

company will consider ten separate FUCO

investments per year. In 1998, nine registered

holding companies made investments in a net total

of 89 new FUCO subsidiaries (or an average of

approximately ten new FUCOs each), as reported in

Item 9 of Form U5S and certificates filed under rule

24. The range of new FUCO subsidiaries was broad,

with one registered holding company increasing its

number of FUCOs by 30, while another decreased

its FUCO subsidiaries by two. The actual cost to

comply with rule 55(a)(1) and (2) will vary

depending on the level of FUCO activity

undertaken by a holding company in a particular

year.

71See supra note 34 and accompanying text.

Information from a small sample of registered

domestic rates. This will allow state

regulators to consider whether any

remedial action is necessary to address

this impact.

The recordkeeping and reporting

requirements of the rule will give the

Commission and other interested

regulators the ability to better monitor,

regulate and provide comments and

recommendations concerning the FUCO

activities of registered holding

companies. This will further the goals of

the Energy Policy Act by helping

regulators to protect domestic ratepayers

from the risks associated with these

activities.64

Proposed Rule 56. Proposed rule 56,

which clarifies the status of certain

system companies that hold interests in

EWGs and FUCOs, benefits those

registered holding companies that

structure their ownership of FUCOs

through an intermediate entity. Without

this rule, an acquisition which would be

exempt from Commission approval

under rule 55, for example, could

nevertheless require an application and

Commission approval as to the creation

and acquisition of the intermediate

company, and that company’s

acquisition of the FUCO interest. This

rule eliminates the need for such a

filing, and thus creates savings similar

to those provided by rule 55(a). As

discussed in section IV above, proposed

rule 56 may isolate certain risks

associated with foreign ventures, but

should not result in additional risk to

consumers.

Proposed Amendment to Rule 87. The

proposed amendment to rule 87 will

allow the Commission to monitor

services to EWGs and FUCOs to help us

prevent the diversion of management

and goods to these companies by other

system companies. The ability of the

Commission to prevent transactions

which could have a detrimental effect

on the system’s operating utilities will

benefit domestic ratepayers in ways that

are not possible to quantify.65 The filing

of certificates pursuant to rule 24 will

inform the Commission of services

rendered to EWGs and FUCOs and

facilitate audits of system companies.66

State and federal regulators will obtain

such information through the

requirement that registered holding

companies furnish them copies of

applications under rule 87 and

certificates pursuant to rule 24. Finally,

prior Commission approval will ensure

that system companies are fairly

reimbursed for the use of their

employees’ time or for the provision of

goods.

Costs

Proposed Rule 55; Proposed

Amendments to Forms U–57 and U5S.

Rule 55, and the related amendments to

Forms U–57 and U5S, will impose

certain costs on registered holding

companies. We believe that the

procedures to be followed in rule 55(a)

and rule 55(b) are similar to those used

by any prudent corporation, utilizing

existing personnel and in consultation

with outside professionals, in

determining whether to make any

significant investment in a foreign

venture.67 Based on our experience in

reviewing and granting the 100%

Orders, we believe that each of the six

holding companies with a 100% Order

has already implemented FUCO

investment procedures consistent with

the proposed rule, or can comply with

the rule’s risk-assessment and review

requirements with only minimal

additional expenditures. The other five

registered holding companies with

FUCO investments as of December 31,

1998, may also utilize similar

procedures.68 Therefore, we believe that

rule 55(a) and (b) should not result in

significant additional costs for a holding

company to make a FUCO investment;

rather, these provisions would

incorporate common business practice

in a Commission rule. Nevertheless, we

are providing cost estimates based on

the assumption that registered holding

companies would be required to

implement various procedures as a

result of the proposed rule.

Proposed rule 55 prescribes the

conditions under which a registered

holding company can invest in a FUCO.

If the company complies with all

applicable provisions of the rule, it may

make the investment without the need

to apply for or receive our approval.

Paragraphs (a), (c) and (d) of the rule

apply to all FUCO investments.

Paragraph (b) applies to all FUCO

investments not covered by an effective

Commission order.69 Assuming

paragraph (b) is applicable, use of the

rule’s safe harbor provision will cause

registered holding companies to incur

costs related to the following:

• Adopting risk-assessment

methodologies that address the risks of

FUCO investments (rule 55(a)(1));

• Receiving formal approval of each

FUCO investment by the company’s

board of directors based on certain

findings (rule 55(a)(2));

• Monitoring services to FUCOs by

utility personnel and service company

personnel (rule 55(a)(3));

• Verifying that certain adverse

events have not occurred (rule 55(b)(1));

• Maintaining books and records

concerning FUCO investments as

required by rule 53 and in the manner

required by rule 53 (rule 55(c));

• Preparing and promptly filing

reports of FUCO investments with the

Commission and other interested

regulatory authorities (rule 55(d)).

We estimate that a registered holding

company will incur an annual cost of

approximately $200,000 in connection

with establishing and updating riskassessment methodologies consistent

with rule 55(a)(1). In addition, we

estimate that a registered holding

company will incur an average cost of

approximately $50,000 each year in

connection with implementing these

methodologies under rule 55(a)(2).70 We

base these estimates on our experience

in monitoring FUCO investments and

our familiarity with internal procedures

currently used by registered holding

companies in making these investments,

particularly under 100% Orders and

through staff audits of holding

companies with FUCO investments.71

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules 9257

holding companies was obtained through staff

audits. We note that the actual cost of complying

with the rule, particularly rule 55(a)(1), could be

significantly higher for companies that utilize the

assistance of third parties in determining whether

to make a FUCO investment.

72Like estimates associated with rule 55(a)(1) and

(a)(2), these estimates are based on our experience

in monitoring FUCO investments and our

familiarity with internal procedures currently used

by registered holding companies in making these

investments. We have assumed that registered

holding companies will make investments in a total

of approximately 90 FUCO subsidiaries annually,

based on FUCO investments reported by registered

holding companies during fiscal 1998. See supra

note 70.

73This amount assumes that a registered holding

company will spend an average of 50 hours at an

average hourly wage rate of $100 per hour.

74The availability of rule 54’s safe harbor

provision is conditioned, among other things, on a

registered holding company maintaining books and

records under rule 53(a)(2). Rule 53(a)(2)’s books

and records maintenance provisions cover

investments in both EWGs and FUCOs. See 17 CFR

250.54 and 250.53(a)(2).

75Furthermore, as noted in the amended

instructions to Form U–57, the same form may be

used to fulfill the requirements of both rule 55 and

57. We expect that registered holding companies

will file one report both to claim FUCO status for

their FUCO subsidiaries and to report the amount

of investments made in these subsidiaries.

76This amount represents 34 annual Form U–57

filings multiplied by three additional hours to

distribute the information under rule 55(d) at an

hourly cost of $50 for in-house clerical staff. See

also section X.C. infra.

77This amount is composed of (1) $31,250 for inhouse professional and support staff to prepare and

file the Form U–1 with the Commission (250 hours

x $125 per hour), and (2) an additional $18,750 for

outside professional fees (75 hours x $250 per

hour). We estimate that only one Form U–1 filing

will be made annually under amended rule 55(b).

See section X.E. infra.

78As discussed in section X.E. infra, this amount

is comprised of (1) $10,000 of in-house professional

costs (80 hours x $125 per hour) and (2) $150 of

in-house clerical costs (three hours x $50 per hour).

We estimate that only one Form U–1 filing will be

made annually under amended rule 87.

79Pub. L. 104–121, Title II, 110 Stat. 857 (1996).

80This total represents the aggregate amount of

capital invested by registered holding companies in

FUCOs, as reported to the Commission on annual

report Form U5S.

81 44 U.S.C. 3501 et seq.

Assuming each of the 11 registered

holding companies with FUCO

investments as of December 31, 1998,

establishes, implements and updates

procedures under rule 55(a)(1) and (2),

we estimate that the aggregate cost

would be $2.75 million each year.

We estimate that review for

compliance with the criteria contained

in rule 55(a)(3) and rule 55(b)(1) will

cost each registered holding company

an additional $200,000 per year.72 The

aggregate annual cost for the 11

registered holding companies with

FUCO investments as of December 31,

1998, would be $2.2 million.

We estimate that implementing formal

board review of FUCO investments will

involve a one-time cost of $5,000 for

each registered holding company.73 We

believe that board review can be

obtained during regularly scheduled

board meetings and that, once review of

FUCO investments becomes part of a

board’s regular agenda, the cost of

compliance will be nominal.

Registered holding companies that

have EWG and/or FUCO investments

already maintain books and records

regarding these investments under rule

53(a)(2).74 Accordingly, we believe that

there will be no additional cost for

maintaining books and records under

proposed rule 55(c).

Rule 55(d) would require only

registered holding companies to file

Form U–57 for the purpose of reporting

all FUCO investments and amends the

form for this new purpose. Also under

rule 55(d), registered holding companies

will be required to provide state and

local regulators with copies of all

documents filed with the Commission

that pertain to the registered holding

company’s FUCO investments (i.e.,

Forms U–57, Forms U–1, certificates

under rule 24 and Item 9 of Form U5S).

However, as those FUCOs in which

registered holding companies currently

invest are the same as those for which

the holding company has claimed FUCO

status (on current Form U–57), the

amendment will not itself increase the

number of Form U–57s filed annually.75

However, the form’s (and rule 55(d)’s)

new dissemination requirements could

impose additional costs. We estimate

that the annual cost for registered

holding companies to comply with rule

55(d)’s filing requirement will be

approximately $5,100 annually.76 This

amount includes the cost of copying and

disseminating the Form U–57, including

exhibits, to other interested regulators.

We estimate that the additional

reporting burden imposed by the

amendment to Form U5S will be

minimal.

When rule 55(b) applies to a FUCO

investment, a holding company must

obtain our approval to make the

investment. We estimate that the cost of

a routine uncontested application for a

FUCO investment or group of

investments contained in the same

application to be approximately

$50,000.77 Accordingly, holding

companies eligible for the rule’s ‘‘safe

harbor’’ provision would forego the

costs associated with preparing

applications.

Proposed Rule 56. Because rule 56 has

the effect only of clarifying the status of

certain subsidiaries of registered

holding companies, no compliance cost

is associated with the rule.

Proposed Amendment to Rule 87. To

the extent that a registered holding

company’s EWGs and FUCOs engage in

transactions with other companies in

the holding company system, the

proposed amendment to rule 87 will

cause registered holding companies to

incur costs related to preparing and

filing a Form U–1 seeking Commission

authorization for the proposed

transactions. We estimate that the cost

of preparing and filing the Form U–1 for

this authorization to be $10,150.78

Request for Comment

We are sensitive to the costs and

benefits imposed by our rules.

Therefore, we request comment on the

potential costs and benefits associated

with the proposed rules and

amendments, and on any suggested

alternatives to the proposals. We request

quantitative data concerning these costs

and benefits, particularly relating to

costs imposed by rule 55(a) and (b).

We request information regarding the

potential impact of the proposals on an

annual basis. For purposes of the Small

Business Regulatory Enforcement

Fairness Act of 1996,79 a rule is ‘‘major’’

if it has resulted, or is likely to result in:

• An Annual effect on the economy of

$100 million or more;

• A major increase in costs or prices

for consumers or individual industries;

or

• Significant adverse effects on

competition, investment or innovation.

Commenters should provide

empirical data on any of these three

areas. We note that, as of December 31,

1998, registered holding companies had

$8.2 billion invested in FUCOs.80

Accordingly, if, for example, rule 55

was likely to result in a one percent

increase or decrease annually in FUCO

investments, the rule could be deemed

a ‘‘major’’ rule.

X. Paperwork Reduction Act

Certain provisions of proposed rule 55

and the proposed amendments to Form

U–57 and Form U5S contain ‘‘collection

of information’’ requirements within the

meaning of the Paperwork Reduction

Act of 1995 (‘‘PRA’’) 81, and the

Commission has submitted them to the

Office of Management and Budget

(‘‘OMB’’) for review in accordance with

44 U.S.C. 3507(d) and 5 CFR 1320.11.

The titles for these collections of

information are: (1) ‘‘Rule 55,

Exemption for Certain Acquisitions of

One or More Foreign Utility

Companies’’; (2) ‘‘Rule 57(a), Rule 55(d)

and Form U–57, Notification of Foreign

Utility Company Status and Notification

of Acquisition of an Interest in a Foreign

Utility Company’’; and (3) ‘‘Rule 1(c)

9258 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules

82Rule 53(a)(2) requires each registered holding

company with an EWG or FUCO investment to

maintain books and records regarding these

investments in the manner prescribed by the rule.

83We estimate that current rule 55’s

recordkeeping and retention responsibilities are

performed by in-house accounting, financial and

bookkeeping staff, at an average rate of $100 per

hour.

84As of December 31, 1998, 11 of the 18 active

registered holding companies had FUCO

investments.

85We estimate that rule 55(a)(1)’s responsibilities

will be primarily performed by, and equally divided

among (i) in-house attorneys, accountants and

senior management, at an average rate of $150 per

hour, and (ii) other in-house personnel (including

financial, accounting and legal support staff), at an

average rate of $100 per hour.

86We also note that, in addition to burden hours,

the rule may impose additional costs, particularly

in those cases where registered holding companies

retain third parties to assist in assessing FUCO

investments.

87See supra note 72 and accompanying text.

88We estimate that rule 55(a)(2)’s responsibilities

will be primarily performed by (i) in-house

attorneys, accountants and senior management, at

an average rate of $150 per hour, and (ii) other inhouse personnel (including financial, accounting

and legal support staff), at an average rate of $100

per hour.

89We assume that the review for compliance with

rules 55(a)(3) and 55(b)(1) will be performed

annually by each registered holding company with

a FUCO investment. See supra note 85.

90We estimate that rule 55(a)(3) and 55(b)(1)’s

responsibilities will be primarily performed by, and

divided equally among (i) in-house attorneys,

accountants and senior management, at an average

rate of $150 per hour, and (ii) other in-house

personnel (including financial, accounting and legal

support staff), at an average rate of $100 per hour.

91As rule 55(c)’s recordkeeping requirement is

identical to that of rule 53, the hour burden

estimate for rule 55(c) is the same as that currently

approved for rule 53—110 burden hours per year

(10 hours per response x 11 respondents = 110

burden hours).

92See supra note 74 and accompanying text.

93Retention periods found in 17 CFR part 257 are

incorporated into the rule.

and Form U5S thereunder, Annual

Report.’’ Rule 55, Form U–57 and Form

U5S, which the Commission is

proposing to amend, contain currently

approved collections of information

under OMB control numbers 3235–

0430, 3235–0428 and 3235–0164,

respectively. The currently approved

collections of information for Form U–

1 and rule 24, under OMB control

numbers 3235–0125 and 3235–0126,

respectively, also will be modified as a

result of the proposed rule 55 and

amendment to rule 87. The titles for

these collections of information are: (1)

‘‘Form U–1 (17 CFR 259.101),

Application or Declaration under the

Public Utility Holding Company Act of

1935’’; and (2) ‘‘Rule 24, 17 CFR 250.24,

Reports of Consummation of

Transactions.’’ An agency may not

sponsor, conduct, or require responses

to a collection of information unless it

displays a currently valid OMB control

number.

A. Rule 55

Current proposed rule 55 provides for

a ‘‘safe harbor’’ for FUCO investments

when the requirements of rule 53(a) and

(b) are satisfied. The current annual

reporting burden under rule 55 reflects

rule 53(a)(2)’s recordkeeping and

retention requirement.82 Current rule 55

does not create a reporting burden for

respondents. The current approved

annual burden under rule 55 is 110

burden hours per year (10 hours per

response x 11 responses = 110 burden

hours). The number of annual responses

reflects one response for 11 registered

holding companies per year. The cost of

the burden, estimated to be $100 per

hour 83, is $1,000 per response. The

aggregate burden for all respondents is

$11,000.

Proposed new rule 55 requires

registered holding companies to perform

certain tasks and satisfy certain

conditions in connection with making

any investment in a FUCO. The

information collection associated with

the rule is necessary to assist the

Commission in monitoring FUCO

investments to ensure that they are

made prudently and only when proper

safeguards are in place. The information

will also give the Commission and other

interested regulators the ability to better

monitor, regulate and provide

comments and recommendations

concerning the FUCO activities of

registered holding companies.

We estimate that the annual burden

associated with establishing and

updating rule 55(a)(1) methodologies

would be approximately 1,600 hours for

each registered holding company.

Assuming that 11 registered holding

companies adopt these methodologies,84

the total annual burden would be

approximately 17,600 hours (one

response per year × 11 respondents ×

1,600 hours = 17,600 hours). The cost of

the reporting burden, estimated to be

$125 per hour, 85 would be $200,000 per

respondent. The aggregate burden for all

respondents would be $2.2 million.86

We also note that, in addition to

burden hours, the rule may impose

additional costs, particularly in those

cases where holding companies retain

third parties to assist in assessing FUCO

investments.87 As discussed in section

IX above, however, we believe that the

burden hours imposed by the rule on

the 11 holding companies with FUCO

investments as of December 31, 1998,

particularly those six with 100%

Orders, would be substantially less.

We estimate that the annual burden

associated with implementing

methodologies in rule 55(a)(2) would be

400 hours for each registered holding

company. Accordingly, the aggregate

annual burden for 11 registered holding

companies would be 4,400 hours (400

hours per response × 11 responses =

4,400 burden hours). The cost of the

reporting burden, estimated to be $125

per hour,88 would be $50,000 per

respondent. The aggregate burden for all

respondents would be $550,000.

We also estimate that the annual

burden hours associated with the review

for compliance with rules 55(a)(3) and

55(b)(1) would be approximately 1,600

additional burden hours for each

registered holding company.

Accordingly, the aggregate annual

burden for 11 registered holding

companies 89 would be 17,600 hours

(1,600 hours per response × 11

responses = 17,600 hours). Each of these

11 registered holding companies will

make one response per year. The cost of

the reporting burden, estimated to be

$125 per hour,90 would be $200,000 per

respondent. The aggregate burden for all

respondents would be $2.2 million.

We estimate that rule 55(c)’s

recordkeeping requirements would

impose an annual burden of

approximately 10 hours for each

registered holding company.91

Accordingly, the aggregate annual

burden for 11 registered holding

companies would be 330 hours.

However, as discussed above, each

registered holding company with an

EWG or FUCO investment is required to

maintain books and records regarding

these investments under rule 53(a)(2).92

Accordingly, we believe that the

proposed rule itself does not impose any

additional burden for maintaining books

and records. Burden estimates for rule

55(d)’s filing requirements are discussed

in section X.C. below.

Compliance with rule 55 would be

mandatory for any registered holding

company making a FUCO investment.

Responses to the disclosure

requirements of the rule will not be kept

confidential unless granted confidential

treatment. Rule 55(c) includes

mandatory retention periods for books

and records.93

B. Rule 87

The proposed amendment to rule 87

will require Commission approval

under section 13(b) of the Act before

any subsidiary of a registered holding

company may perform services or

construction for, or sell goods to, an

EWG or a FUCO. The information

collection associated with the amended

rule would further the Commission’s

monitoring of intercompany

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules 9259

94We currently estimate that 48 Forms U–57 are

filed annually and that the current hour burden for

each filing is three hours (48 responses x three

burden hours per response = 144 hours).

95We estimate that the information provided in

Form U–57 is prepared primarily by in-house

financial, accounting and legal support staff, at an

average rate of $100 per hour.

96 In 1998, 78 Form U–57s were filed with the

Commission by 34 different filers. In 1999, 92 Form

U–57s were filed with the Commission by a total

of 27 different filers. In each of these years,

approximately one-third of all filings was made by

registered holding companies. We estimate that the

number of Form U–57s filed will continue to

increase slightly and therefore estimate a new total

of 101 responses per year, or an increase of 53

responses. We also estimate that approximately

one-third, or 34, of the forms filed annually will be

filed by registered holding companies.

97This burden hour estimate is based on the

current approved burden of three hours per form.

We believe that, when used to report rule 55

transactions, the Form U–57 also will require three

hours to complete. This estimate assumes that up

to three related transactions are being reported on

one form. To the extent a registered holding

company reports more than three transactions

simultaneously on one Form U–57, the hour burden

may increase.

98We estimate that the information provided in

Form U–57 is prepared primarily by in-house

financial, accounting and legal support staff, at an

average rate of $100 per hour.

99We estimate that the dissemination

requirement of rule 55(d) will be performed by inhouse clerical staff, at an average cost of $50 per

hour.

100We estimate that the information provided in

Form U5S is prepared primarily by in-house

financial, accounting and legal support staff, at an

average rate of $100 per hour.

transactions in order to prevent the

diversion of management and goods to

EWGs and FUCOs by other system

companies, and would ensure that

system companies are fairly reimbursed

for the use of their employees’ time or

for the provision of goods.

Rule 87 does not currently have a

reporting burden because it does not

involve a collection of information

under the PRA. The proposed

amendment to rule 87 is discussed

under ‘‘—Form U–1’’ below.

Compliance with the proposed

amendment to rule 87 would be

mandatory for any registered holding

company with certain arrangements

between its EWGs or FUCOs and its

other associate companies. Responses to

the disclosure requirements of the rule

will not be kept confidential unless

granted confidential treatment.

C. Form U–57

The preparation and filing of Form U–

57 with the Commission and certain

state regulators under rule 55 would be

required for each FUCO investment

made by any registered holding

company, whether under the new rule’s

safe harbor or by Commission order.

Because proposed rule 55 would permit

FUCO investment without our prior

review or approval, the form will be

used to notify the Commission of FUCO

investments made in reliance on the

rule and assist the staff in monitoring

these investments in order to protect

customers of the associate operating

utilities.

The current approved burden estimate

for Form U–57 is 144 hours.94 The cost

of this reporting burden, estimated to be

$100 per hour,95 is $300 per filing and

the total annual cost is $14,400 for all

respondents. However, the form is

currently used by registered holding

companies, and other entities, only to

claim FUCO status for qualifying

subsidiaries. Rule 55(d) would require

the filing of Form U–57 by registered

holding companies for the purpose of

reporting all FUCO investments and

amends the form for this additional

purpose. In order to reflect recent

trends, we propose to change the

current number of annual filings from

48 to 101.96 We also estimate that, when

used to report rule 55 transactions, the

amended Form U–57 will require

approximately three hours to

complete.97 We believe that rule 55(d)’s

requirement for registered holding

companies to provide state and local

regulators with copies of all documents

filed with the Commission that pertain

to the registered system’s investment in

FUCOs (i.e., Forms U–57, Forms U–1,

certificates under rule 24 and Item 9 of

Form U5S) will add three burden hours

for each of the 34 forms filed by

registered holding companies.

Therefore, we estimate a total increase

of 261 annual burden hours for all

respondents (three hours x 53 additional

forms, plus three hours (under rule

55(d)) x 34 forms (those filed by

registered holding companies)). The

total annual hour burden for Form U–

57 would increase from 144 hours to

405 hours as a result of the proposed

amendment and the adjustment to

reflect recent trends.

We estimate that, as is currently

estimated, the cost of preparing a Form

U–57 filing under rule 55 will be $100

per hour.98 In addition, we estimate that

the cost for registered holding

companies to disseminate the 34 of

these forms they will file each year will

cost an additional $50 per hour.99 The

total annual cost for all respondents,

therefore, would increase by $21,000,

from $14,400 to $35,400 (101 total

filings × 3 hours × $100 per hour =

$30,300, plus 34 filings (those filed by

registered holding companies) × 3

additional hours (under rule 55(d)) ×

$50 per hour = $5,100; $30,300 plus

$5,100 = $35,400).

Compliance with amended Form U–

57 would be mandatory for any

registered holding company making a

FUCO investment. Responses to the

disclosure requirements of the form will

not be kept confidential unless granted

confidential treatment.

D. Form U5S

The amendment to Item 9 of Form

U5S will require the holding company

to disclose whether it has sought

recovery of losses or inadequate returns

on FUCO investments through higher

rates to system retail ratepayers. This

information will assist the Commission

staff in protecting ratepayers from

adverse consequences of FUCO

investments by registered holding

companies. Rule 55(d) will require that

this information also be provided to

other interested governmental

regulators.

The current approved annual

reporting burden for Form U5S is 257

hours (13.5 hours per response × 19

responses = 256.5 burden hours).

Nineteen Forms U5S are filed annually,

one by each of the 19 registered holding

companies. The cost of the reporting

burden, estimated to be $100 per

hour, 100 is $1,350 per response. The

aggregate cost for all responses is

$25,650 per year.

We estimate that the proposed

amendment would increase the hour

burden per filing by one-half hour for

those registered holding companies with

FUCO investments. For the 11 registered

holding companies with FUCO

investments as of December 31, 1998,

this would result in a total annual

burden increase of 5.5 hours, or 262

hours for all registered holding

companies. The aggregate cost for all

respondents will increase by $550, from

$25,650 to $26,200 per year.

Compliance with amended Form U5S

would be mandatory for any registered

holding company making a FUCO

investment. Responses to the disclosure

requirements of the form will not be

kept confidential unless granted

confidential treatment.

E. Form U–1

When rule 55(a)’s safe harbor is not

available, rules 55(a)(4) and 55(b)(1)

require that the registered holding

company seek a Commission order to

make a FUCO investment. This will

require the holding company to prepare

and file an application on Form U–1.

The current approved annual reporting

burden for Form U–1 is 224 hours per

form. The Commission presently

estimates that 121 forms are filed by 15

respondents annually, for a current

approved aggregate burden of 27,104

9260 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules

101As noted above, we currently estimate that

each registered holding company spends

approximately 224 hours to prepare, file and

process a Form U–1. Because of the complex nature

of the authority to be sought, we believe the burden

estimate for a Form U–1 filed under amended rule

87 would be slightly greater.

102We estimate that preparation of a Form U–1

under rule 55(b) is primarily performed by, and

divided equally among (i) in-house attorneys,

accountants and senior management, at an average

hourly rate of $150 per hour, and (ii) other in-house

personnel (including financial, accounting and legal

support staff), at an average rate of $100 per hour.

In addition, the staff estimates that outside

attorneys and accountants will spend an additional

75 hours to assist the registered holding company

in preparing and filing the form, at an average

hourly rate of $250. See supra note 77 and

accompanying text.

103We note that this is significantly less than the

250 hours estimated for a Form U–1 filed under rule

55(b). The lower burden estimate reflects the

limited scope of the filing under amended rule 87.

104We estimate that preparation of a Form U–1

is primarily performed by, and divided equally

among (i) in-house attorneys, accountants and

senior management, at an average rate of $150 per

hour, and (ii) other in-house personnel (including

financial, accounting and legal support staff), at an

average rate of $100 per hour. We do not estimate

that outside professionals will be retained to

prepare and file this form.

105We estimate that preparing and filing rule 24

certificates will be primarily performed by, and

equally divided among (i) in-house attorneys,

accountants and senior management, at an average

rate of $150 per hour, and (ii) other in-house

personnel (including financial, accounting and legal

support staff), at an average rate of $100 per hour.

hours. The cost of the reporting burden,

estimated to be $200 per hour, is

$44,800 per response. The total cost is

$5,420,800 for all respondents. Due to

recent changes in filing trends, we

propose to change the current estimates

only with respect to the estimated

number of annual respondents.

We propose to increase the annual

number of respondents by 18 (from 15

to 33). For the three-year period ended

December 31, 1999, an average of 15

registered holding companies filed Form

U–1s each year. Over that same period,

an average of 18 other companies filed

Form U–1s annually. Therefore, the

increase reflects the annual average

Form U–1 filers other than registered

holding companies. As the two

additional annual Form U–1 filings

resulting from the proposed rules and

amendments will be filed by registered

holding companies (because these rules

apply only to them), and most registered

holding companies already file at least

one Form U–1 annually, we do not

expect that the new rules and

amendments will increase the annual

number of Form U–1 respondents.

We estimate that approximately 250

burden hours will be required to

prepare the Form U–1, under rules

55(a)(4) and 55(b)(1), describing the

FUCO investment sought to be

approved, respond to questions or

comments, and file post-effective

amendments as may be necessary or

appropriate.101 We estimate that an

average of one new Form U–1 will be

filed annually under the amended rule,

resulting in a total of 250 burden hours

per year. The cost of the reporting

burden, estimated to be $125 per

hour,102 would be $31,250 per response.

The aggregate hour burden for Form U–

1 would then increase to 27,354 hours

and the aggregate cost would then

increase to $5,452,050 per year for all

respondents. In addition, rule 55 will

also result in an increase in the number

of statements filed under rule 24. These

statements must be filed with the

Commission upon consummation of a

transaction approved by the

Commission. See ‘‘Rule 24’’ below.

The proposed amendment to rule 87

will require Commission approval

under section 13(b) of the Act before

any subsidiary of a registered holding

company may perform services or

construction for, or sell goods to, an

EWG or a FUCO. We estimate that each

of the 12 active registered holding

companies with FUCO and/or EWG

investments as of December 31, 1998,

that engages in these activities, has

previously sought and obtained our

approval to do so under section 13 or

other provisions of the Act.

Accordingly, we do not believe that the

amendment itself will result in the filing

of any additional applications by

current registered holding companies.

However, an existing or newly formed

registered holding company may, in the

future, seek our approval under the

amended rule. Therefore, we estimate

that rule 87, as amended, will result in

one additional Form U–1 filing per year.

We estimate the annual burden hours

associated with the preparing and filing

of the form would be approximately 80

hours, 103 at an estimated cost of $125

per hour.104 We estimate that furnishing

state and federal regulators copies of

applications under rule 87 and

certificates under rule 24 will require an

additional three annual burden hours of

clerical time, at an estimated cost of $50

per hour. Accordingly, the aggregate

annual burden for all registered holding

companies would be 83 hours (83 hours

per response × 1 respondent = 83

hours). The total annual cost would be

$10,150 for all respondents. As a result,

the aggregate hour burden for Form U–

1 would increase to 27,437 hours and

the aggregate cost would be $5,462,200

per year for all respondents. In addition,

the amendment to rule 87 will also

result in an increase in the number of

statements filed under rule 24. See

‘‘Rule 24’’ below.

F. Rule 24

In addition to requiring one

additional Form U–1 to be filed

annually, rule 55(b) will increase the

number of statements required under

rule 24 which must be filed with the

Commission upon consummation of a

transaction approved by the

Commission. The amendment to rule 87

will also increase the number of

statements required under rule 24. The

current approved annual burden under

rule 24 is 636 burden hours per year (2

hours per response × 318 responses =

636 burden hours). It is currently

estimated that these certificates are filed

by 134 respondents per year. The cost

of the reporting burden, estimated to be

$125 per hour,105 is $250 per response.

The total cost is $79,500 for all

respondents.

We estimate that the additional Form

U–1 filed each year under rule 55(b)

will require one additional certificate, or

one additional response by one

additional respondent, under rule 24,

and that completion of the certificate

will require two burden hours.

Accordingly, the total burden hours will

increase by two hours and the total

hourly annual burden will increase to

638 hours (2 hours per response × 319

responses = 638 burden hours). The cost

of the reporting burden, estimated to be

$125 per hour, is $250 per response, or

a total of $250 for all responses under

rule 55(b). The total cost would increase

to $79,750 for all respondents.

In addition, we estimate that the

additional Form U–1 filed per year

under rule 87 will require four

additional certificates, or four additional

response by one additional respondent,

under rule 24, and that completion of

each certificate will require two burden

hours. The current approved annual

reporting burden for rule 24, as adjusted

to reflect the increase resulting from

proposed rule 55(b), is 638 hours (2

hours per response × 319 responses =

638 burden hours). Including the

amendment to rule 87, the total burden

hours will increase by eight hours and

the total hourly annual burden will

increase to 646 hours (2 hours per

response × 323 responses = 646 burden

hours). The cost of the reporting burden,

estimated to be $125 per hour, is $250

per response, or a total of $1,000 for all

four responses under rule 87. The total

cost, adjusted for both rule 55(b) and the

amendment to rule 87, is $80,750 for all

respondents.

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules 9261

G. Request for Comment

The Commission requests comment

on the reasonableness of these

estimates. Commenters who disagree are

requested to provide their own

estimates with supporting rationales.

Pursuant to 44 U.S.C. 3506(c)(2)(B),

the Commission solicits comments in

order to:

• Evaluate whether the proposed

collections of information are necessary

for the proper performance of the

functions of the agency, including

whether the information will have

practical utility;

• Evaluate the accuracy of the

agency’s estimate of the burden of the

proposed collections of information;

• Enhance the quality, utility, and

clarity of the information to be

collected; and

• Minimize the burden of the

collections of information on

respondents, including through the use

of automated collection techniques or

other forms of information technology.

Persons wishing to submit comments

on the collection of information

requirements should direct them to the

following persons: (i) Desk Officer for

the Securities and Exchange

Commission, Office of Information and

Regulatory Affairs, Office of

Management and Budget, Room 3208,

New Executive Office Building,

Washington, DC 20503; and (ii)

Jonathan G. Katz, Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW., Washington, DC 20549–

0609, with reference to File No. S7–05–

01. OMB is required to make a decision

concerning the collections of

information between 30 and 60 days

after publication, so a comment to OMB

is best assured of having its full effect

if OMB receives it within 30 days of

publication.

Requests for materials submitted to

OMB by the Commission with regard to

this collection of information should be

in writing, refer to File No. S7–05–01

and be submitted to the Securities and

Exchange Commission, Records

Management, Office of Filings and

Information Services.

XI. Statutory Authority

The Commission is proposing rules 55

and 56 pursuant to sections 14, 15, 20

and 33 of the Act, as amended, and is

proposing the amendment to rule 87

pursuant to sections 13, 14, 15, 20, 32

and 33 of the Act, as amended.

XII. Text of Proposed Rules and

Amendments

List of Subjects in 17 CFR Parts 250 and

259

Electric utilities, Holding companies,

Reporting and record keeping

requirements.

For the reasons set out in the

preamble, title 17, Chapter II of the Code

of Federal Regulations is proposed to be

amended as follows:

PART 250—GENERAL RULES AND

REGULATIONS, PUBLIC UTILITY

HOLDING COMPANY ACT OF 1935

1. The authority citation for part 250

is revised to read as follows:

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

79t, 79z–5a and 79z–5b unless otherwise

noted.

2. Sections 250.55 and 250.56 are

added to read as follows:

§ 250.55 Acquisitions of foreign utility

companies.

(a) FUCO investments. A registered

holding company may not, directly or

indirectly, acquire the securities of, or

any interest in, a foreign utility

company (‘‘FUCO Investment’’) unless

the following conditions are satisfied:

(1) The board of directors of the

registered holding company has adopted

procedures (‘‘FUCO Investment

Procedures’’) designed to analyze the

risks of investing in foreign

jurisdictions, including, for example,

operational risks, construction risks,

commercial risks, management risks,

political risks, legal risks, financing

risks and foreign currency risks.

(2) The board of directors has

reviewed, and adopted a resolution

approving, the FUCO Investment based

upon, among other things, findings that:

(i) The FUCO Investment Procedures

have been complied with;

(ii) Measures have been, or will be,

taken to mitigate the risks that the

FUCO Investment presents to the

holding-company system; and

(iii) The FUCO Investment and any

related financing have been structured

so that ratepayers of the system’s publicutility companies are adequately

insulated from any adverse effects of the

FUCO Investment.

(3) No more than two percent of the

employees of the system’s domestic

public-utility companies render

services, at any one time, directly or

indirectly, to exempt wholesale

generators or foreign utility companies

in which the registered holding

company, directly or indirectly, holds

an interest; provided, that the

Commission has previously approved

the rendering of such services.

(4) If paragraph (b) of this section is

applicable, the registered holding

company has obtained an order from the

Commission approving the FUCO

Investment.

(b) Commission approval of certain

investments.

(1) A registered holding company may

not make FUCO Investments except

pursuant to an order granted by the

Commission if any of the following

events has occurred: (i) The registered

holding company, or any subsidiary

company having assets with book value

exceeding an amount equal to 10% or

more of consolidated retained earnings

(‘‘Significant Subsidiary’’), has been the

subject of a bankruptcy or similar

proceeding, unless a plan of

reorganization has been confirmed in

such proceeding;

(ii) The registered holding company

system’s average consolidated retained

earnings for the four most recent

quarterly periods, as reported on the

holding company’s Form 10–K or 10–Q

(§ 249.308a or § 249.310 of this chapter)

filed under the Securities Exchange Act

of 1934 (15 U.S.C. 78a–78) as amended,

have decreased by 10% from the average

for the previous four quarterly periods

and the aggregate investment in exempt

wholesale generators and foreign utility

companies exceeds two percent of the

registered holding company system’s

total capital invested in utility

operations. This restriction will cease to

apply once consolidated retained

earnings have returned to their pre-loss

level;

(iii) In its previous fiscal year, the

registered holding company reported

operating losses attributable to its direct

or indirect investments in exempt

wholesale generators and foreign utility

companies, and such losses exceed an

amount equal to 5% of consolidated

retained earnings;

(iv) If, during the three fiscal years

preceding the acquisition, the holding

company has reported, in response to

Item 9 of Form U5S (§ 259.5s of this

chapter) increases for retail customers

have been obtained in order to recover

losses or inadequate returns on FUCO

Investments;

(v) Any Significant Subsidiary of the

holding company that is a public-utility

company has a rating from a nationally

recognized statistical rating organization

with respect to its debt securities that is

less than investment grade; or

(vi) The registered holding company’s

investment in FUCOs and EWGs

exceeds 50% of consolidated retained

earnings or such greater amount as may

be authorized by the Commission by

order under § 250.53(c).

9262 Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules

(2) An applicant that is required to

obtain Commission approval of FUCO

Investments must affirmatively

demonstrate that the investments:

(i) Will not have a substantial adverse

impact upon the financial integrity of

the registered holding company system;

and

(ii) Will not have an adverse impact

on any utility subsidiary of the

registered holding company, or its

customers, or on the ability of State

commissions to protect the subsidiary or

its customers.

(c) Books and records. A registered

holding company that makes a FUCO

Investment must maintain, and cause its

subsidiaries to maintain, the books and

records required by § 250.53 in the

manner prescribed by § 250.53. The

registered holding company will

provide the Commission or its

representatives with access to these

books and records in the United States,

at such place as the Commission may

reasonably request. The books and

records must be maintained for the

periods set forth in Part 257 of this title,

as appropriate.

(d) Form U–57 and other filings. A

registered holding company that makes

a FUCO Investment must, within ten

business days of making the FUCO

Investment, file a statement on Form U–

57 (§ 259.207 of this chapter) with the

Commission. The company must also

simultaneously submit complete copies

of the following, including exhibits, to

every federal, state or local regulator

having jurisdiction over the rates of any

system public-utility company:

(1) The Form U–57 filed by the

registered holding company in

connection with the FUCO Investment;

(2) Any Forms U–1 (§ 259.101 of this

chapter) and certificates under § 250.24

filed by the registered holding company

in connection with the issuance of

securities for purposes of financing the

FUCO Investment, the entering into of

service, sales or construction contracts,

or the creation or maintenance of any

other relationship with the foreign

utility company and the registered

holding company, its affiliates or

associate companies; and

(3) A copy of Item 9 of Form U5S

(§ 259.5s of this chapter) and Exhibits G

and H to that Form.

§ 250.56 Status of subsidiary companies

of registered holding companies formed to

hold interests in foreign utility companies.

A subsidiary of a registered holding

company which is engaged exclusively

in the direct or indirect ownership of

the securities, or an interest in the

business of, one or more foreign utility

companies, shall be deemed to be a

foreign utility company.

3. Section 250.87 is amended by

adding paragraphs (d) and (e) to read as

follows:

§ 250.87 Subsidiaries authorized to

perform services or construction or to sell

goods.

* * * * *

(d) This section shall not be

applicable to the performance of

services or construction for, or the sale

of goods to, an associate company of a

registered holding company if such

associate company is an exempt

wholesale generator or a foreign utility

company. This section shall further not

be applicable to the receipt by an

associate company of a registered

holding company of services or

construction from, or the purchase of

goods from, an associate company that

is an exempt wholesale generator or a

foreign utility company.

(e) Any application, or amendment

thereto, filed directly or indirectly by a

registered holding company seeking

authority to render services or

construction or to sell goods to an

exempt wholesale generator or foreign

utility company, or to receive services,

construction or goods from an exempt

wholesale generator or foreign utility

company, must be simultaneously

submitted to every State commission

and to every federal or local governing

body having jurisdiction over the retail

rates of any affected public-utility

company in the registered holding

company system.

PART 259—FORMS PRESCRIBED

UNDER THE PUBLIC UTILITY

HOLDING COMPANY ACT OF 1935

Subpart A—Forms for Registration and

Annual Supplements

4. The authority citation for part 259

is revised to read as follows:

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

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

5. Item 9 of Form U5S (referenced in

§ 259.5s) is amended by adding

paragraph (e) to read as follows:

Note: The text of Form U5S does not and

the amendment will not appear in the Code

of Federal Regulations.

Form U5S

* * * * *

Annual Report

* * * * *

Item 9. Wholesale Generators and

Foreign Utility Companies

(e) State whether or not the holding

company has sought recovery of losses

or inadequate returns on any investment

in a foreign utility company through

higher rates to retail ratepayers.

* * * * *

6. Section 259.207 and Form U–57

(referenced in § 259.57) are revised to

read as follows:

§ 259.207. Form U–57, for notification of

foreign utility company status pursuant to

rule 57(a) (§ 250.57 of this chapter) and

statement by registered holding company in

connection with the acquisition of an

interest in a foreign utility company

pursuant to rule 55 (§ 250.55 of this

chapter).

This form shall be filed pursuant to

section 33(a)(3)(B) of the Act by a

company claiming foreign utility

company status. This form shall also be

filed by a registered holding company

acquiring any securities or other interest

in the business of a foreign utility

company. See §§ 250.55 and 250.57 of

this chapter.

Note: The text of Form U–57 does not and

the amendment will not appear in the Code

of Federal Regulations.

OMB Approval

OMB Number: 3235–0428.

Expires: October 31, 2001.

Estimated average burden hours per

response: 3.00.

Securities and Exchange Commission,

Washington, DC. 20549: FORM U–57—

Notification of Foreign Utility Company

Status and Notification of Acquisition of

an Interest in a Foreign Utility Company

Filed Under Section 33(c) or Rule 55

of the Public Utility Holding Company

Act of 1935.

lllllllllllllllllllll

(Name of registered holding company)

lllllllllllllllllllll

(Name of foreign utility company)

General Instructions

1. Use of Form

This form should be filed by, or on

behalf of, a company that is or proposes

to become a foreign utility company.

This form should also be filed by a

registered holding company that

acquires an interest in a foreign utility

company. See rule 55. A single filing on

this form should be made by both the

company claiming FUCO status and the

registered holding company that makes

an investment in the FUCO.

2. Formal Requirements

File two copies of this form with the

Commission. Manually sign and file one

copy at the place designated by the

Federal Register / Vol. 66, No. 26 / Wednesday, February 7, 2001 / Proposed Rules 9263

Commission for filings under the laws it

administers. Provide the second copy to

the Division or Office responsible for

administering the Act. Registered

holding companies submitting this form

under rule 55 shall simultaneously

submit copies of this form to each

federal, state or local regulator having

jurisdiction over the rates of any publicutility company affiliated with the

holding company.

3. Definitions and Other Matters

All terms used have the same

meaning as in the Public Utility Holding

Company Act of 1935 and rules and

regulations. All monetary amounts

reported on this form must be stated in

United States dollars.

4. Withdrawal of Filing

Amend this form within 45 days of a

determination that the company

identified as the foreign utility company

is not a foreign utility company (i.e., due

to a change in its business, a change in

applicable law or otherwise).

Item 1

For each interest in a foreign utility

company (‘‘company’’) acquired,

identify the company, its location and

its business address. Describe the

facilities used for the generation,

transmission and distribution of electric

energy for sale or for the distribution at

retail of natural or manufactured gas.

Identify each system company that

holds an interest in the company and

describe the interest held. To the extent

known, identify each person that holds

five percent or more of any class of

voting securities of the foreign utility

company and describe the amount and

nature of the interest.

Item 2

State the purchase price paid for the

foreign utility company. State the type

and amount of capital invested in the

company by the registered holding

company, directly or indirectly. Identify

any debt or other financial obligation for

which there is recourse to a system

company (other than an exempt

wholesale generator or foreign utility

company). Identify separately any direct

or indirect guarantee of a security of the

foreign utility company by the

registered holding company.

Item 3—Associate Companies

Name each domestic associate publicutility company and, if applicable, its

holding company.

Item 4—Books and Records

Identify the location of the books and

records required by rule 53. By filing

this form, the registered holding

company undertakes that it will provide

the Commission or its representatives

with access to these books and records

in the United States, at such place as the

Commission may reasonably request.

Exhibit A

If applicable, the state certification(s)

required under section 33(a)(2) of the

Act. Certification(s) previously filed

with the Commission which are still in

effect and which encompass the foreign

utility company for which this

notification is being filed may be

incorporated by reference. If the

certification(s) is not available at the

time of filing the Form U–57, so state,

and undertake to file such certification

as an amendment when available.

Signature

The undersigned registered holding

company has duly caused this statement

to be signed on its behalf by the

undersigned thereunto duly authorized.

By lllllllllllllllllll

(Signature and printed name and title of

signing officer)

Date llllllllllllllllll

By the Commission.

Dated: February 1, 2001.

Margaret H. McFarland,

Deputy Secretary.

Appendix A

Note: Appendix A to the preamble will not

appear in the Code of Federal Regulations.

Regulatory Flexibility Act Certification

I, Arthur Levitt, Chairman of the Securities

and Exchange Commission (‘‘Commission’’),

hereby certify pursuant to 5 U.S.C. 605(b),

that proposed rules 55 and 56 and

amendments to rule 87, Form U–57 and Form

U5S under the Public Utility Holding

Company Act of 1935, as amended (‘‘Holding

Company Act’’), would not, if adopted, have

a significant economic impact on a

substantial number of small entities.

Proposed rule 55 would define the

circumstances under which a holding

company registered under section 5 of the

Holding Company Act can acquire an interest

in a foreign utility company (‘‘FUCO’’)

without the need to apply for or receive

Commission approval. Proposed rule 56

would clarify the status of intermediate

subsidiaries of registered holding companies

that engage exclusively in the business of

owning or operating, or both owning and

operating, FUCOs, or a combination of

eligible wholesale facilities (‘‘EWGs’’) and

FUCOs. Under proposed rule 56, a registered

holding company, unless otherwise

restricted, could acquire the securities of, or

an interest in, such a company without the

need to apply for or receive Commission

approval. The proposed amendment to rule

87 requires, with certain exceptions, a

registered holding company to obtain a

Commission order before an EWG or FUCO

could provide services to, or construction for,

or sell goods to, an associate company. The

proposed amendment to rule 87 also would

require registered holding companies to

furnish state and federal regulators copies of

applications under rule 87 and certificates

under rule 24 of the Holding Company Act.

The proposed amendments to Form U–57

and Form U5S govern reporting requirements

relating to transactions subject to the

proposed rules and rule amendments.

The proposed rules and amendments apply

only to holding companies registered under

section 5 of the Holding Company Act.

Presently, there are 30 registered holding

companies, none of which qualifies as a

‘‘small business’’ or ‘‘small organization’’ for

purposes of the Regulatory Flexibility Act.

Accordingly, the proposed rules and

amendments would not have a significant

economic impact on a substantial number of

small entities.

Dated: January 31, 2001.

Arthur Levitt,

Chairman.

[FR Doc. 01–3155 Filed 2–6–01; 8:45 am]

BILLING CODE 8010–01–P

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 52

[TX–105–1–7404; FRL–6935–2]

Approval and Promulgation of Air

Quality State Implementation Plans;

Texas; Approval of Clean Fuel Fleet

Substitution Program Revision

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: The EPA is proposing to

approve the State of Texas’ Clean Fuel

Fleet (CFF) substitute plan,

incorporating them into the State

Implementation Plan (SIP) under the

Federal Clean Air Act (CAA). The

State’s CFF Substitute Plan is addressed

in the SIP revision submitted on August

27 1998, and supplemented with

additional technical information in a

letter to the EPA dated November 17,

2000, by the State of Texas for the

purpose of establishing a substitute CFF

program.

In the Final Rules Section of this

Federal Register, EPA is approving this

SIP submittal as a direct final rule

without prior proposal because we view

it as noncontroversial and anticipate no

adverse comments. See the direct final

rule for detailed rationale for the

approval. If EPA receives no adverse

comments in response to this action, no

further activity is contemplated. If EPA

does receive adverse comments, we will