[Federal Register Volume 66, Number 26 (Wednesday, February 7, 2001)]
[Proposed Rules]
[Pages 9247-9263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3155]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

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.

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

[[Page 9247]]



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.

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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: <a href="/cdn-cgi/l/email-protection#4032352c256d232f2d2d252e3433003325236e272f36"><span class="__cf_email__" data-cfemail="651710090048060a0808000b1116251600064b020a13">[email protected]</span></a>. 
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\
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    \1\ See Holding Company Act Release No. 25757 (Mar. 8, 1993), 58 
FR 13719 (Mar. 15, 1993) (``Proposing Release'').
    \2\ The 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).
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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:
    <bullet> The registered holding company to implement review and 
risk-assessment methodologies that address the risks of FUCO 
investments;
    <bullet> That no more than 2% of the registered system's domestic 
utility employees render services to EWGs and FUCOs;
    <bullet> That registered holding companies keep accurate books and 
records with respect to their FUCO investments and

[[Page 9248]]

make these books and records available to our staff; and
    <bullet> 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:
    <bullet> 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);
    <bullet> 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));
    <bullet> 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
    <bullet> 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\
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    \3\ As 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.
    \4\ See 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.
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    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 far-flung 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\

[[Page 9249]]

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.
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    \5\ See 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).
    \6\ Section 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.
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    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\
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    \7\ Section 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)).
    \8\ Sections 32(e) and 32(g) of the Act.
    \9\ Section 33(c)(1) directs us to adopt rules concerning 
registered holding companies' acquisition of interests in FUCOs.
    \10\ See, 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.
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    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.
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    \11\ The 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).
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    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.
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    \12\ See 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.'').
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    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.
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    \13\ See Proposing Release, supra note 1. In the Proposing 
Release, we proposed rules 53, 54, 55, 56 and 57.
    \14\ See 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.
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    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

[[Page 9250]]

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.
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    \15\ The 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).''
    \16\ Rule 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.
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    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\
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    \17\ Under 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.
    \18\ See rule 53(c) (17 CFR 250.53(c)).
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    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 
world-wide 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\
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    \19\ American 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.
    \20\ Alabama 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'').
    \21\ We 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.
    \22\ See supra note 11.
    \23\ See City of New Orleans at 9 (``Congress * * * intended 
that all foreign utility company acquisition be routinely subjected 
to SEC pre-approval'').
    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.
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    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\
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    \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.
    \25\ The 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.
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    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\
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    \26\ See Adopting Release, supra note 14. Unlike section 32, 
section 33 did not establish a date by which the Commission must 
promulgate rules regarding FUCOs.
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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

[[Page 9251]]

Concept Release, we are reproposing the rule.\28\
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    \27\ See 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).
    \28\ We are also addressing issues raised by significant FUCO 
ownership by foreign and domestic registered holding companies. See 
section VII, infra.
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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-
by-case 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 
time-consuming 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\
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    \29\ See 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.
    \30\ AEP 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.
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    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.
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    \31\ Southern Co., Holding Co. Act Release No. 26501, citing the 
Proposing Release, supra note 1.
    \32\ We 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.
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    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\
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    \33\ Section 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.
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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 country-specific 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\
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    \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 protection, as well as an evaluation of risk balanced against 
projected returns. Southern at 15-16.

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[[Page 9252]]

    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 risk-
mitigation 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\
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    \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.
---------------------------------------------------------------------------

    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\
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    \36\ Proposed 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).
    \38\ See section 1(b)(2) (15 U.S.C. 79a(b)(2)).
    \39\ See, e.g., Statement of Rep. Markey, 138 Cong. Rec. H11446 
(Oct. 5, 1992).
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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:
    <bullet> 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\
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    \40\ If, for example, a holding company has received a 100% 
Order, the percentage would be 100%.
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    <bullet> 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\
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    \41\ At 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).
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    <bullet> 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
    <bullet> 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:
    <bullet> 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.
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    \42\ 15 U.S.C. 79e(c). Item 9 of Form U5S requires the reporting 
of information concerning EWGs and FUCOs.
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    <bullet> The securities of any Significant Subsidiary that is a 
public-utility company were rated less than

[[Page 9253]]

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\
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    \43\ Department of State at 1-2.
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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.
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    \44\ The 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.
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    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\
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    \45\ See 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).
    \46\ See 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.
    \47\ See section 33(c)(2) of the Act (15 U.S.C. 79z-5b(c)(2)).
    \48\ Section 33(c)(1) of the Act (15 U.S.C. 79z-5b(c)(1)).
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    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\
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    \49\ We 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.
    \50\ NEES 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.
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    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/

[[Page 9254]]

National Grid Order and which is reflected in reproposed rule 55.
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    \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.
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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\
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    \52\ See 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.
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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\
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    \53\ See Rule 87 Proposing Release, supra note 46.
    \54\ Filings 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.
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    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\
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    \56\ Comments on the proposed amendment to rule 87 may be found 
in File No. S7-28-93.
    \57\ Allegheny Power System; AEP; Columbia; CNG; and GPU.
    \58\ Id.
    \59\ Northeast; Southern.
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    State regulators and consumer groups supported the proposal but 
believed that it was too narrow.\\60\ 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.
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    \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.
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    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.
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    \61\ See, 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \62\ See Energy Corp., Holding Company Act Release Nos. 27040 
and 27039 (Jun. 22, 1999).
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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.
    <bullet> 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,

[[Page 9255]]

to the extent known, each person that holds five percent or more of any 
class of voting securities of the FUCO.
    <bullet> 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.
    <bullet> Item 3 requires the identification of each domestic 
associate public-utility company and, if applicable, its holding 
company.
    <bullet> 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. public-utility 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

[[Page 9256]]

domestic rates. This will allow state regulators to consider whether 
any remedial action is necessary to address this impact.
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    \63\ Item 9 of Form U5S requires the reporting of information 
concerning EWGs and FUCOs.
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    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\
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    \64\ See supra note 11 and accompanying text.
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    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.
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    \65\ For 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.
    \66\ See supra note 55.
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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.
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    \67\ 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. 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.
    \68\ As 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.
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    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:
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    \69\ For 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.
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    <bullet> Adopting risk-assessment methodologies that address the 
risks of FUCO investments (rule 55(a)(1));
    <bullet> Receiving formal approval of each FUCO investment by the 
company's board of directors based on certain findings (rule 55(a)(2));
    <bullet> Monitoring services to FUCOs by utility personnel and 
service company personnel (rule 55(a)(3));
    <bullet> Verifying that certain adverse events have not occurred 
(rule 55(b)(1));
    <bullet> Maintaining books and records concerning FUCO investments 
as required by rule 53 and in the manner required by rule 53 (rule 
55(c));
    <bullet> 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 risk-assessment 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\
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    \70\ This 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.
    \71\ See supra note 34 and accompanying text. Information from a 
small sample of registered 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.

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[[Page 9257]]

    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.
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    \72\ Like 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.
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    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.
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    \73\ This amount assumes that a registered holding company will 
spend an average of 50 hours at an average hourly wage rate of $100 
per hour.
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    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).
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    \74\ The 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).
---------------------------------------------------------------------------

    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.
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    \75\ Furthermore, 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.
    \76\ This 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.
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    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.
---------------------------------------------------------------------------

    \77\ This amount is composed of (1) $31,250 for in-house 
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.
---------------------------------------------------------------------------

    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\
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    \78\ As 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.
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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:
---------------------------------------------------------------------------

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

    <bullet> An Annual effect on the economy of $100 million or more;
    <bullet> A major increase in costs or prices for consumers or 
individual industries; or
    <bullet> 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.
---------------------------------------------------------------------------

    \80\ This total represents the aggregate amount of capital 
invested by registered holding companies in FUCOs, as reported to 
the Commission on annual report Form U5S.
---------------------------------------------------------------------------

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)

[[Page 9258]]

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.
---------------------------------------------------------------------------

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

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.
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    \82\ Rule 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.
    \83\ We 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.
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    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  x  
11 respondents  x  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\
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    \84\ As of December 31, 1998, 11 of the 18 active registered 
holding companies had FUCO investments.
    \85\ We 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.
    \86\ We 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \87\ See supra note 72 and accompanying text.
---------------------------------------------------------------------------

    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  x  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.
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    \88\ We 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 in-house personnel (including financial, accounting and legal 
support staff), at an average rate of $100 per hour.
---------------------------------------------------------------------------

    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 
x  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.
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    \89\ We 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.
    \90\ We 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.
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    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.
---------------------------------------------------------------------------

    \91\ As 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).
    \92\ See supra note 74 and accompanying text.
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    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\
---------------------------------------------------------------------------

    \93\ Retention periods found in 17 CFR part 257 are incorporated 
into the rule.
---------------------------------------------------------------------------

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

[[Page 9259]]

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.
---------------------------------------------------------------------------

    \94\ We 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).
    \95\ We 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.
    \97\ This 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.
---------------------------------------------------------------------------

    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  x  3 hours  x  $100 per hour = $30,300, plus 34 filings 
(those filed by registered holding companies)  x  3 additional hours 
(under rule 55(d))  x  $50 per hour = $5,100; $30,300 plus $5,100 = 
$35,400).
---------------------------------------------------------------------------

    \98\ We 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.
    \99\ We estimate that the dissemination requirement of rule 
55(d) will be performed by in-house clerical staff, at an average 
cost of $50 per hour.
---------------------------------------------------------------------------

    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  x  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.
---------------------------------------------------------------------------

    \100\ We 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.
---------------------------------------------------------------------------

    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

[[Page 9260]]

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.
---------------------------------------------------------------------------

    \101\ As 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.
    \102\ We 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.
---------------------------------------------------------------------------

    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  x  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.
---------------------------------------------------------------------------

    \103\ We 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.
    \104\ We 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.
---------------------------------------------------------------------------

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  x  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.
---------------------------------------------------------------------------

    \105\ We 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.
---------------------------------------------------------------------------

    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  x  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  x  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  x  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.

[[Page 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:
    <bullet> 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;
    <bullet> Evaluate the accuracy of the agency's estimate of the 
burden of the proposed collections of information;
    <bullet> Enhance the quality, utility, and clarity of the 
information to be collected; and
    <bullet> 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:


Sec. 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 public-utility 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 (Sec. 249.308a or 
Sec. 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 
(Sec. 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 Sec. 250.53(c).

[[Page 9262]]

    (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 Sec. 250.53 in the manner prescribed 
by Sec. 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 (Sec. 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 (Sec. 259.101 of this chapter) and certificates 
under Sec. 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 (Sec. 259.5s of this chapter) and 
Exhibits G and H to that Form.


Sec. 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:


Sec. 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 Sec. 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 Sec. 259.57) are 
revised to read as follows:


Sec. 259.207.  Form U-57, for notification of foreign utility company 
status pursuant to rule 57(a) (Sec. 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 (Sec. 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 
Secs. 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.

----------------------------------------------------------------------
(Name of registered holding company)
----------------------------------------------------------------------
(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

[[Page 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 public-
utility 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 public-utility 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---------------------------------------------------------------------

(Signature and printed name and title of signing officer)

Date------------------------------------------------------------------

    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


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