[Senate Hearing 107-279]
[From the U.S. Government Publishing Office]
S. Hrg. 107-279
PUBLIC UTILITY HOLDING COMPANY ACT OF 2001--S. 206
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SECURITIES AND INVESTMENT
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
S. 206
TO REPEAL THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, TO ENACT THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 2001 AND FOR OTHER PURPOSES
__________
MARCH 29, 2001
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
_______
U.S. GOVERNMENT PRINTING OFFICE
77-694 WASHINGTON : 2002
____________________________________________________________________________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming JACK REED, Rhode Island
CHUCK HAGEL, Nebraska CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania EVAN BAYH, Indiana
JIM BUNNING, Kentucky ZELL MILLER, Georgia
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada DEBBIE STABENOW, Michigan
JON S. CORZINE, New Jersey
Wayne A. Abernathy, Staff Director
Steven B. Harris, Democratic Staff Director and Chief Counsel
Linda L. Lord, Chief Counsel
Dean V. Shahinian, Democratic Counsel
George E. Whittle, Editor
______
Subcommittee on Securities and Investment
MICHAEL B. ENZI, Wyoming, Chairman
CHRISTOPHER J. DODD, Connecticut, Ranking Member
RICHARD C. SHELBY, Alabama TIM JOHNSON, South Dakota
MIKE CRAPO, Idaho JACK REED, Rhode Island
ROBERT F. BENNETT, Utah CHARLES E. SCHUMER, New York
WAYNE ALLARD, Colorado EVAN BAYH, Indiana
CHUCK HAGEL, Nebraska JON S. CORZINE, New Jersey
RICK SANTORUM, Pennsylvania THOMAS R. CARPER, Delaware
JIM BUNNING, Kentucky DEBBIE STABENOW, Michigan
Katherine McGuire, Staff Director
Joel Oswald, Professional Staff Member
(ii)
C O N T E N T S
----------
THURSDAY, MARCH 29, 2001
Page
Opening statement of Senator Enzi................................ 1
Opening statements, comments, or prepared statements of:
Senator Corzine.............................................. 3
Senator Allard............................................... 9
Prepared statement....................................... 31
Senator Bunning.............................................. 10
Prepared statement....................................... 31
Senator Shelby............................................... 11
Prepared statement....................................... 31
Senator Stabenow............................................. 13
Senator Gramm................................................ 20
Senator Bayh................................................. 25
WITNESSES
Isaac C. Hunt, Jr., Commissioner, Securities and Exchange
Commission..................................................... 4
Prepared statement........................................... 32
Cynthia A. Marlette, Deputy General Counsel, Federal Energy
Regulatory Commission.......................................... 7
Prepared statement........................................... 36
David M. Sparby, Vice President for Government and Regulatory
Affairs, Xcel Energy, Incorporated............................. 14
Prepared statement........................................... 41
David L. Sokol, Chairman and CEO, MidAmerican Energy Holdings
Company........................................................ 15
Prepared statement........................................... 46
Charles A. Acquard, Executive Director, National Association of
State Utility Consumer Advocates (NASUCA)...................... 18
Prepared statement........................................... 49
Additional Material Supplied for the Record
Prepared statement of Marty Kanner, Coordinator, On Behalf of
Consumers for Fair Competition................................. 53
S. 206........................................................... 59
(iii)
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 2001--S. 206
----------
THURSDAY, MARCH 29, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on Securities and Investment,
Washington, DC.
The Subcommittee met at 10:10 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Michael B. Enzi
(Chairman of the Subcommittee) presiding.
OPENING STATEMENT OF SENATOR MICHAEL B. ENZI
Senator Enzi. I will call this hearing to order.
I was asked by the Chairman of the Banking Committee to
announce that this will be the first hearing since the first of
the 50-State quarter plasters were installed. A new plaster
will go up every 10 weeks. These are the new quarters. I can
hardly wait until the Wyoming one goes up in 2007.
[Laughter.]
However, we are pushing for a space right here above the
quarters, right in the center, for the Sacagawea dollar. We
call that the Wyoming Dollar.
[Laughter.]
She may have been born in Idaho and shortly after that,
kidnapped to North Dakota, and then went on the great
expedition with Louis and Clarke through the whole west. But
after she had seen the whole west, she chose to live out the
rest of her life in Wyoming. We were so pleased to have her
chosen for the coin. A bunch of Wyoming kids were involved in
that process. We will be looking for that plaster to go up as
well.
To get down to the more serious business of this hearing, I
would like to welcome everyone to the Senate Banking
Subcommittee on Securities and Investments. The hearing is on
S. 206, the Public Utility Holding Company Act of 2001. The
bill was sponsored by my colleague, Senator Shelby from
Alabama.
This is my first hearing as Chairman of the Subcommittee on
Securities and Investments. I look forward to addressing other
issues of similar importance in the future.
I would also like to thank the witnesses for their
willingness to be here today and to share their insights on the
role of this Act in 21st Century energy markets.
I apologize for our slight delay in getting started. We are
in the middle of a vote. Others will be joining me here
shortly, as Senator Corzine has.
I would mention that my first involvement with PUHCA
actually goes back about 12 years. It was as a result of my
daughter, who was then in 4th grade, doing an experiment in
buying stocks as a class activity. At the dinner table, I asked
her what stock she had purchased. After she told me, I asked
her why. And she said, well, it had a huge increase that day. I
asked her what the trends had been. She had no idea.
So, she was willing to sit down at the computer with me and
look it up on the Internet. We got a little explanation of the
ac-
tivity of the previous day and found out that Senator Wallop of
Wyoming had sponsored a bill to repeal PUHCA. Of course, that
led us to some other Internet activities, where we found out
what PUHCA was.
I have to admit that as we finished up some 1 hour of being
on the computer, my daughter said to me, so why did you look up
CMS? I bought CML.
[Laughter.]
But it is been a tremendous advantage to me all of these
years to have had some background in PUHCA and to follow the
almost annual attempt to repeal it.
A lot of things have changed since the Public Utility
Holding Company Act, PUHCA, was first passed into law in 1935,
partly as a result of the 1929 stock market crash.
Our modern, high-tech economy has placed such demand on our
aging energy grids, that we are now outpacing our ability to
generate electricity.
As a result, much of our Nation is poised on a fine edge,
where we can expect more and more brown-outs, like those
recently experienced in California.
There is no other way to explain things, other than to say
that we failed to plan for our future energy needs, and
California's problems are only the beginning.
By failing to develop a national energy policy, we have
allowed our dependence on foreign energy supplies to place our
Nation at a great risk.
By placing short-term gains ahead of long-term stability,
we have caused energy prices to jump dramatically across the
United States. With the lines blurring between energy
production, transportation, and consumption in the new high-
tech economy, flexibility is going to become more and more
important.
Without flexibility, we place incredible limits on our
energy markets and limit our ability to adapt innovations that
could revolutionize our children's futures.
The question before us today, therefore, is, given the need
for flexibility, is there room for a statute like PUHCA?
There are considerable arguments that PUHCA has outlived
its purpose. It was created in 1935, and was designed to fill a
regulatory void that had allowed electricity and gas-holding
companies to take advantage of the situation, and place layer
upon layer of corporations between themselves and their
customers.
Before PUHCA, holding companies could hide behind the
corporate layers to avoid liability and to manipulate consumer
rates by requiring operating companies to contract services
with each other at exorbitant prices.
This self-dealing drove up consumer rates and threatened
service when highly-leveraged holding companies were unable to
pay their debts after the stock market crash in 1929.
PUHCA put an end to many of these unfair practices and
abuses by stripping back the corporate shields and limiting
holding companies to just two levels.
The statute then placed authority to monitor securities
mergers and other activities within the companies with the
Securities and Exchange Commission. Companies were then granted
an exclusive service area in return for a requirement to
provide reliable electricity service to all consumers at a
regulated price.
As I said earlier, however, times have changed and the role
played by the SEC and PUHCA in utility regulation has evolved.
The Federal Energy Regulatory Commission now has
jurisdiction over all interstate wholesale electricity
generation, and State public utility commissions are now
controlling agencies that oversee State utility rates. Those
are things that were missing in 1929 and 1935.
The Department of Justice and the Federal Trade Commission
now have authority over holding companies and share in
regulating their structure and functions. The void that existed
before PUHCA no longer exists.
This oversight redundancy has created a situation where
even the SEC has agreed that PUHCA is no longer necessary to
protect investors or the rate-paying public. In fact, PUHCA has
become
a barrier to competition in the energy marketplace and it
inhibits
investment.
I have some very high hopes about the future of Wyoming. I
see the need exists in the United States for reliable,
affordable energy and recognize that Wyoming is in a prime
position to fill those needs. But I am also concerned that
without adequate flexibility, diversity, and planning,
Wyoming's options for the future will be severely hamstrung.
PUHCA has a chilling effect on Wyoming investments because
it limits the numbers of companies allowed to participate in
investing in Wyoming's future. It also limits the kind of
investments that are allowed. PUHCA repeal is an important step
in the development of a comprehensive, real world energy
policy.
I look forward to hearing from our witnesses and hope they
will be able to shed some light on what should be done with
PUHCA.
Senator do you have an opening statement that you would
like to make?
STATEMENT OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman. I appreciate you
holding this hearing.
I think I probably should have requested your daughter to
come on staff to help me with what PUHCA was.
[Laughter.]
As you might recognize, it is not something that was at the
front of my agenda in my previous life. But I do think that
this is a particularly important review, given our current
energy situation. And I, like others, will be open-minded about
an appropriate policy in this area. I am looking forward to the
hearing, and I thank the witnesses for participating.
I think it is pretty clear that anything put together in
1935 has reasons to be reviewed to see whether it is
appropriate, whether it is overlapping or out of date and
unreasonably costly. And I look forward to this hearing to help
frame those issues in my own mind.
Thank you very much for being here.
Senator Enzi. This is one of those issues that kind of goes
in the glaze-your-eyes-over category. But, fortunately, the
energy crisis has brought it to a level where there is some
interest in doing something now.
Senator Corzine. Absolutely.
Senator Enzi. We have before us from the first panel, Mr.
Isaac C. Hunt, Jr., who is the Commissioner of the Securities
and Exchange Commission, and Ms. Cynthia Marlette, who is the
Deputy General Counsel for the Federal Energy Regulatory
Commission.
We look forward to your testimony.
Mr. Hunt.
STATEMENT OF ISAAC C. HUNT, JR.
COMMISSIONER, SECURITIES AND EXCHANGE COMMISSION
Mr. Hunt. Thank you, Chairman Enzi, and other Members of
the Subcommittee.
I am Commissioner Isaac C. Hunt of the U.S. Securities and
Exchange Commission. I am pleased to have this opportunity to
testify before you this morning on behalf of the SEC regarding
the Public Utility Holding Company Act of 1935.
The Commission continues to support efforts to repeal the
1935 Act and replace it with legislation that preserves certain
important consumer protections.
During the first quarter of the last century, misuse of the
holding company structure led to serious problems in the
electric and gas industries. Abuses arose, including inadequate
disclosure of the financial position and earning power of
holding companies, unsound accounting practices, excessive debt
issuances and abusive affiliate transactions. The 1935 Act was
enacted to address these problems.
In the years following the passage of the 1935 Act, the
Securities and Exchange Commission worked to reorganize and
simplify existing public utility holding companies in order to
eliminate the problems that Congress identified.
By the early 1980's, the SEC concluded that the 1935 Act
had accomplished its basic purpose. The SEC also concluded that
many aspects of the 1935 Act regulation had become redundant:
State regulation had expanded and strengthened since 1935, and
the SEC had enhanced its regulation of all issuers of
securities, including public utility holding companies.
In addition, changes in the accounting profession and the
investment banking industry had provided investors and
consumers with a range of protection unforeseen in 1935.
Because of these changes, the SEC unanimously recommended that
Congress repeal the 1935 Act based on its conclusion that it
was no longer necessary to prevent the recurrence of abuses
that led to the Act's enactment.
For a number of reasons, including the potential for abuse
through the use of a multistate holding company structure,
related concerns about consumer protection, the lack of a
consensus for change, repeal legislation was not enacted during
the early 1980's. Because of continuing changes in the
industry, however, the SEC continued to look at ways to
administer the statute more flexibly.
In response to continuing changes in the utility industry
during the early 1990's, then-Chairman Arthur Levitt directed
the SEC staff in 1994 to undertake a study of the 1935 Act that
culminated in a June 1995 report. The report again recommended
repeal of the 1935 Act. The report also outlined and
recommended that the Commission adopt a number of
administrative initiatives to streamline regulation under the
Act. The SEC has implemented many of the administrative
initiatives that the report recommended.
The utility industry has continued to undergo rapid change
since publication of that report. Congress facilitated some of
these changes by creating a number of statutory exceptions to
the regulatory framework of the 1935 Act.
Specifically, registered holding companies are now free to
own exempt wholesale generators and foreign utilities, and to
engage in a wide range of telecommunications activities.
The industry has also experienced regulatory initiatives,
both at the State level, where the focus has been on fostering
competition, and at the Federal level, where the FERC--Federal
Energy Regulatory Commission--has focused on open transmission
and related structural issues.
The internationalization of the industry has increased as
well. In addition to foreign investments of U.S. utilities, three
British utility companies have acquired American utilities within
the past 2 years and subsequently registered under the Act. A
Canadian utility has also announced its plans to acquire a
utility in the United States.
At the same time that these changes have been taking place
in the electric industry, some problems have arisen. The
electricity shortages, price increases, and rolling black-outs
in California represent some of the most severe problems.
Some industry experts, as well as a number of press
reports, have speculated that other areas of the country may
experience similar problems this summer. As a result of these
issues, energy reform legislation is again being considered in
this Congress. Repeal of PUHCA is a part of this discussion.
Based on the findings in the report, as well as the
continuing pace of change in the utility industry, the SEC has
recommended and continues to recommend that Congress repeal the
1935 Act.
As I will outline below, the SEC also recommends the
enactment of legislation to provide necessary authority to the
Federal Energy Regulatory Commission and the State public
utility commissions relating to affiliate transactions and
audits and access to books and records. Repealing the Act is
not, however, a magical solution to the current problems facing
the United States utility industry.
While PUHCA repeal can be viewed as part of a needed
response to the current energy problems facing the country,
repeal of the Act will not directly affect the supply of
electricity in the United States.
The Energy Policy Act of 1992 amended the 1935 Act to
remove most restrictions on the ability of registered and
exempt holding companies, as well as nonutility companies, to
build, acquire, and own generation facilities anywhere in the
United States.
Repeal of the Act would, however, remove provisions that
prohibit utility companies from owning utilities in different
parts of the country, and that generally prevent nonutility
businesses from acquiring regulated utilities in more than one
State.
Repeal of the 1935 Act would thus likely have the greatest
impact on both the continuing consolidation of the utility
business, as well as the entry of new companies into the
utility business.
As the SEC concluded in its report and testified before,
there is potential for a regulated utility that is a monopoly,
if left unguarded, to charge higher rates and use the
additional funds to subsidize affiliated businesses in order to
boost its competitive position in other markets.
The SEC believes that the best means of guarding against
cross-subsidization is likely to be audits of books and records
and Federal oversight of affiliated transactions.
As a result, the SEC continues to support a broader grant
of authority to the FERC to audit books and records and
believes that it is important that the FERC have the
flexibility to engage in more extensive regulation if
necessary. The SEC urges that S. 206 be amended to include this
grant of authority.
The current situation in California illustrates this need.
California's problems may have been caused by, among other
things, the need to construct additional generating facilities
to meet the supply needs of the State and perhaps additional
transmission facilities. It is unclear whether repeal of the
1935 Act would have any real effect, positive or negative, on
these problems.
However, another component of California's problems is the
precarious financial condition of the State's utilities. While
the cost of acquiring power has had a significant impact on the
financial condition of California's utilities, there have been
suggestions in the press and elsewhere that these utility
financial problems were exacerbated by the holding companies'
decision to use the profits of their regulated utilities'
subsidiaries to finance investments in unregulated businesses.
Regardless of whether these suggestions are true, the
holding companies that own California's utilities are currently
exempt from most provisions of the 1935 Act and are thus,
largely unregulated by the SEC. The potential for abuses of
this type demonstrate the need to give utility regulators
unfettered access to the books and records of holding companies
so that they can develop a full understanding of the types of
transactions occurring within a holding company system.
Questions have also arisen about how the Act, if not
repealed, would impact the FERC's ability to implement its
plans to restructure control of transmission facilities in the
United States.
In particular, the status of new entities that control
transmission systems, as well as the status of utility systems
that own stakes in these new entities, raise a number of issues
under the 1935 Act. Repeal of the Act would render this issue
moot.
In the absence of repeal, although the SEC believes it has
the necessary authority to deal with the restructuring issues,
amending the Act to grant the SEC greater exemptive authority
would allow the Commission to deal more efficiently with
potential regulatory conflicts of this type. Also, granting the
SEC broad exemptive authority would aid in our administration
of the Act as the electric and gas industries continue to
evolve.
Senator Enzi and other Members of the Subcommittee, of
course I would be pleased to answer any of your questions.
Thank you.
Senator Enzi. Thank you.
Ms. Marlette.
STATEMENT OF CYNTHIA A. MARLETTE
DEPUTY GENERAL COUNSEL
FEDERAL ENERGY REGULATORY COMMISSION
Ms. Marlette. Thank you, Senator Enzi, and Members of the
Subcommittee.
My name is Cynthia Marlette and I am Deputy General Counsel
of the Federal Energy Regulatory Commission.
I very much appreciate the opportunity to be here today to
discuss the Public Utility Holding Company Act of 1935, and S.
206, which would repeal that Act and replace it with a more
streamlined holding company act.
I appear before you today as a staff witness and I do not
represent the Commission or any member of the Commission.
As discussed in my written testimony, S. 206 provides an
important piece of the legislative reform that is needed to
support the Nation's emerging competitive electric energy
markets.
At this critical stage in the evolution of the industry, it
is important to take all reasonable measures to support the
development of competitive energy markets and to provide
appropriate incentives for electric and natural gas
infrastructure to meet our Nation's energy needs. However, such
measures must ensure adequate protection of electric and
natural gas rate-payers from abuse of market power and from
inappropriate affiliate cross-subsidization.
Repeal or reform of PUHCA, such as that contained in S.
206, will help accomplish these objectives.
This is a time of enormous change for the electric utility
industry. We are at a critical juncture in the development of
competitive power markets and it is appropriate for the
Congress to reexamine the framework for regulating electric
utilities, including unnecessary restrictions that PUHCA places
on the activities of certain participants in these power
markets.
While one of the goals of PUHCA was to protect against
corporate structures that could harm investors and rate-payers,
today, some of PUHCA's restrictions may actually impede
competition and appropriate competitive market structures, to
the detriment of rate-payers and share-holders in the long run.
Since the Banking Committee's hearings on PUHCA reform were
held in 1996 and 1997, the FERC and many State regulators and
State legislatures have continued to move forward and to take
regulatory actions to support and encourage the development of
competitive markets at both the wholesale as well as the retail
levels. Many areas of the country have been very successful.
But there have been some very severe bumps in the road.
California's experience with only a partially deregulated
electric generation market, and a severe lack of adequate
generation supply and infrastructure, also transmission
infrastructure in California, have recently grabbed media
attention nationwide and caused some regulators and industry
observers to become wary of the promised virtues of competition
in the electric industry. There is no doubt that California and
the west face very serious, complex, electric power supply
problems, particularly this coming summer.
Nevertheless, while regulators and industry participants
may disagree on near-term remedies to address the dysfunctions
in California and western power markets, the majority of
industry observers continue to believe that competitive power
markets, as opposed to traditional heavy-handed, cost-based
regulation, will best serve consumers in the long run.
Enactment of S. 206 would help to remove unnecessary
restrictions on market participants in competitive power
markets.
Critically important, however, it would also ensure that
the FERC and State regulatory authorities have adequate access
to the books and records of all members of all public utility
holding company systems when that information is necessary to
meet their statutory rate-making responsibilities.
This is necessary to prevent affiliate abuse and
subsidization by electricity rate-payers of the nonregulated
activities of holding companies and their affiliates.
S. 206 addresses all of the concerns that were raised by
FERC witnesses in previous hearings and is an appropriate
vehicle for repealing PUHCA without impairing rate-payer
protection.
Finally, I believe that the combination of the books and
records provisions contained in S. 206, in conjunction with the
FERC's additional Federal Power Act access to books and
records, and its other FPA authorities over mergers,
dispositions and acquisitions of jurisdictional facilities, and
over the rate-making and accounting of public utilities, will
provide adequate authority to protect rate-payers in newly
emerging competitive markets.
Thank you, and I will be happy to answer any questions.
Senator Enzi. Well, I thank both of you for your testimony.
We will now have a round of questions, with each Senator being
allowed to ask questions for up to 5 minutes.
Ms. Marlette, you mentioned that FERC had had previous
hearings on this. How many years has FERC been looking at
hearings on repealing PUHCA?
Ms. Marlette. Well, we participated extensively back in the
1992 EPAct hearings with respect to the wholesale generator
exemption provision. And I believe we have participated in
hearings on every bill since that time and have advocated
reform of PUHCA, assuming rate-payer protection remains intact.
Senator Enzi. Thank you. Mr. Hunt mentioned that the SEC
recommended in 1980 that this statute be terminated. It took a
while for the excitement to generate on it.
[Laughter.]
I appreciate your mentioning, and you mentioned it
peripherally, the impacts that PUHCA has had on the California
energy crisis. Could you elaborate a little bit on the
relationship between PUHCA and the crisis in California?
Ms. Marlette. I think the California energy crisis has been
a wake-up call for the entire country. While I do not think
there is a direct nexus between PUHCA reform and the specific
factors that have affected California, I do think that, in the
long run, repeal of PUHCA, to the extent that it removes
restrictions on entities willing to invest in companies that
can provide new infrastructure or expand existing
infrastructure in transmission, electric generation and natural
gas pipelines, can help to avoid similar problems in the future
in the Nation.
Senator Enzi. Thank you. Mr. Hunt, one of the arguments
raised by opponents of PUHCA repeal, is that PUHCA currently
fills a void in regulating holding companies that would
otherwise lead to increased market concentration and increase
the risk of rapid consolidation, and that that would kill the
developing market in its infancy. Do you feel that PUHCA repeal
would allow utilities to gain substantial market power and
inhibit that competition?
Mr. Hunt. I think, Mr. Chairman, the repeal of PUHCA might
lead to continued consolidation in the utility industries. But,
in terms of market power, I think that the restructuring that
the FERC has gone through with the utilities and the
restructuring that many of the States are going through, show
that concerns about market power can be addressed.
Senator Enzi. You mentioned the SEC's support for S. 206,
with some amendments. And that the bill contains adequate
consumer protections to replace those that would be repealed
with passage of this bill. Could you elaborate a little bit on
what those consumer protections are?
Mr. Hunt. Well, I think that part of consumer protection is
our ability to look at affiliate transactions to see that there
is no improper cross-subsidization, no use of rate-payer money
to invest in nonregulated activities of the other subsidiaries
of the holding company. We continue to think that access to
books and the ability to audit the books and records of the
holding companies are necessary powers at the Federal level and
should be vested in the FERC. And also that the State utility
commissions, in keeping with consumer and rate-payer
protection, should have access to the books and records so as
to be able to examine the affiliate transactions within the
holding company systems.
Senator Enzi. Thank you.
Senator Corzine.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Senator Enzi, if I may interrupt you just
one
moment here.
I am going to have to preside at 11 a.m. I wonder if I
might ask special permission from you and the Subcommittee to
submit my written comments for the record now.
Senator Enzi. Without objection, so ordered. We appreciate
it. And I would mention that Senator Shelby is here now. He is
the sponsor of the bill.
Senator Shelby. And Senator Enzi, I would ask that my
opening statement be made part of the record and I will wait my
turn.
Senator Enzi. Without objection.
Senator Corzine.
Senator Corzine. Senator Enzi, presumably, the ability to
check the books and records currently exists. It is just the
overlap that is the problem with PUHCA.
Do you think that the tools of FERC are adequate to be able
to check those books and records? You read now assertions, as
opposed to factual reality, that there may be cross-
subsidization, or at least tie-ins, among the utilities in the
California issue.
And I am just curious whether you think the powers and the
frequency of review is adequate enough to know if we were to
repeal PUHCA and move to a less complicated regulatory
structure, that that would be able to be challenged.
Ms. Marlette. I think that the access to books and records
that is contained in S. 206, in conjunction with what the
Commission already has under Section 301 of the Federal Power
Act, which in and of itself is already fairly broad access to
books and records, would give the Commission sufficient
authority.
The Commission has long been very concerned about
inappropriate cross-subsidization, particularly where you
continue to have captive rate-payers, either at the wholesale
or retail level. And there certainly are many areas of the
country where we do not have captive rate-payers any more. But
we have long been vigilant in looking at affiliate contracts
involving any public utilities or any inappropriate cross-
subsidization.
Senator Corzine. What would be some of the warning signals
you would look for in those cross-subsidizations?
Ms. Marlette. Well, in a traditional rate case, where you
are having cost-based rates, and we are in a transition here
because we are still doing some cost-based, but primarily
moving to market-based rates, when we examine the costs
submitted by the company, the Commission is going to be paying
attention to what those are.
And a key example in the past has been affiliate coal or
fuel contracts and paying more than what you might pay from a
nonaffiliate for the same fuel.
And we have had some conflicts with PUHCA in the past that
led to an Ohio Power court decision which caused some real
problems for us. That is a primary example of what we would
look at.
Senator Corzine. I think making sure you have the adequate
tools and resources to be able to do it. It is a complicated
issue, looking at how holding companies fit together based on
at least my own perspective in life, that it would be
difficult, but not impossible, to do.
And I hope if we move in the direction of S. 206, that we
make sure that there are adequate resources to be able to bring
the checks and balances that I think the public would expect.
Thank you, Senator Enzi.
Senator Enzi. Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Senator Enzi, thank you for holding this
hearing on S. 206, and I look forward to hearing from the
remaining witnesses.
This question is for either witness, opponents of PUHCA
repeal fear that repeal will lead to a greater concentration of
power companies. How do you respond to those concerns?
Mr. Hunt. As I think I responded to Senator Enzi, Senator
Bunning, we at the SEC think that there is the possibility that
repeal of PUHCA would lead to increasing consolidation in the
utility industry. But we also think that----
Senator Bunning. You do believe that.
Mr. Hunt. Yes. We think it is possible. We think it is
entirely possible.
Senator Bunning. Okay.
Mr. Hunt. Because PUHCA does put some restrictions on the
geographic location of utilities and what utility holding
companies can own in various parts of the country and the
utilities have to be in contiguous areas. Yes, we could say
with the removal of those factors, there could be more
consolidation in the utility industry.
But we think that, with the added powers that we hope the
FERC will be given, there will not be either consumer or rate-
payer abuse because they will have adequate authority to look
at affiliate transactions and to look at cross-subsidizations.
Ms. Marlette. I think since the advent of open access
transmission beginning around 1996, we have already seen
tremendous increases in consolidations and mergers at the FERC.
Senator Bunning. I would say that is an understatement.
Ms. Marlette. Correct. And it keeps us very busy. And I
would expect we would see even more if PUHCA were repealed.
However, the Commission has, I believe, adequate authority
over mergers, acquisitions, dispositions of jurisdictional
transmission facilities and transfers of power sales contracts
that often accompany generation transfers.
And the Commission takes a very hard look at increases in
market power attributable to a merger. It looks at rate-payer
impacts and effect on regulation and does not hesitate to
impose conditions to mitigate market power as a condition of
approving merger, if appropriate.
Senator Bunning. Supporters say that PUHCA only affects a
few companies. It gives companies not regulated under PUHCA
an unfair competitive advantage. How do you respond to those
assertions?
Mr. Hunt. There are very few regulated utility holding
companies registered under PUHCA because so many of the utility
companies in the country are intrastate and, therefore,
exempted from most of the provisions of PUHCA.
But we have been trying to administer the Act to create a
level playing field so that the regulated registered holding
companies have as much flexibility as possible for investment
in other activities as do the nonregulated utilities, which
make up the majority of the holding companies in the country.
Senator Bunning. Do you have a different answer, or the
same?
Ms. Marlette. Same.
Senator Bunning. Same answer. I yield back my time.
Senator Enzi. Continuing with the order of arrival, we will
go to Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Senator Enzi. I do want to take
this time to thank you for holding this hearing. We think it is
very important. I think dealing with the PUHCA problem is long
past due. And this is why I have been pushing this on a
legislative plane for a long time.
Ms. Marlette, one of my biggest concerns with PUHCA is that
it inhibits modernization of our national energy policy. What
are your views regarding the effect that PUHCA will have on the
implementation of FERC Order 2000?
Ms. Marlette. FERC Order 2000 is one of the biggest
priorities of the Commission right now. Of course, California
is also one of the biggest priorities.
But the creation of independent regional transmission
organizations is, we think, the key to mitigating the major
market power of vertically-integrated electric utilities,
improving reliability of the transmission grid, and assuring
more efficient use of our transmission facilities.
It will also facilitate transmission expansion and planning
on a regional basis. And it will separate the transmission
ownership and control from the generation entities.
PUHCA right now, I believe, is an impediment to entities
being able to invest in independent transmission companies that
would qualify as RTO's.
I believe there is a risk that investors would become
holding companies and that they would have to register. It may
be that the SEC has latitude under existing law to enact
waivers or something similar. But I think it poses some real
difficulties.
Senator Shelby. Mr. Hunt, do you have any comment?
Mr. Hunt. Yes, sir. We also recognize the possible
conflicts with the FERC if the RTO's come on line, and they may
have to register as holding companies.
We think we have the power under existing law to exempt
them, but that is not at all clear. We think that the repeal of
the existing PUHCA would clear up that potential conflict
between the SEC and the FERC.
Senator Shelby. Ms. Marlette, is the Commission
contemplating any action to ensure the implementation of the
FERC Order 2000 that it would proceed efficiently?
Ms. Marlette. We are trying to proceed as rapidly as we
can. All public utilities had to come in with either proposals
to create RTO's or to join RTO's last October and last January.
All of those filings are in.
The rule that we have in place is voluntary. We have asked
the utilities to either, as I said, join or create an RTO or
explain why they are not. We have said that those RTO's need to
be operational by the end of this calendar year, which will be
no small feat.
Senator Shelby. Just this week, it was announced that the
financial condition of the California utilities force them to
raise rates by as much as 40 percent.
A few months ago, under California's restructuring plan,
these same utilities put out for bid some of their generating
assets in an effort to raise cash. It is my understanding that
because of the restrictions imposed by PUHCA, only a limited
number of entities bid on those assets.
Could it be argued that by limiting the number of bidders,
PUHCA indirectly limited the amount of capital the utilities
raised and that lack of capital in turn affected the size of
the rate hike that was ultimately put in place? In other words,
PUHCA contributed to making a bad situation worse.
Ms. Marlette. I may defer to Commissioner Hunt on that. I
would just say that the rate hike, I think, was the result of--
--
Senator Shelby. As a sponsor of the legislation, that
question came naturally.
Ms. Marlette. Right. Right.
[Laughter.]
But I think a combination of very complex factors led to
that
rate hike.
Mr. Hunt. Senator Shelby, I think there is certainly some
possibility that PUHCA's restrictions on the possibility of
people and entities who could invest in----
Senator Shelby. Limited it, anyway, didn't it?
Mr. Hunt. It certainly is possible that PUCHA could have
limited the number of investors willing to go into the
California scene, yes, sir.
Senator Shelby. S. 206 is intended to strengthen FERC and
the State regulators' authority to obtain the books and records
of the companies in the holding company system.
Ms. Marlette, I know you look at this from the other side
of the issue. But how do you assess these provisions as a means
to provide rate-payer protections?
Ms. Marlette. I think that they will help us to provide
rate-payer protections, the provisions in S. 206, because they
will allow us to look at a broader category of entities' books
and records than we currently can look at.
Senator Shelby. Okay. Thank you, Senator Enzi.
Senator Enzi. Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Senator Enzi.
If I may just follow up as it relates to concerns that I
know that have been raised about the States lacking authority
or resources to provide adequate oversight of interstate public
utility holding company activities. Could you speak more
specifically to that, as to their ability, authority, to be
able to do that and the resources? Do you feel confident that
that will be available?
Either one of you.
Mr. Hunt. Well, we think the FERC is an essential element
in the continuing regulatory scheme because, with the
interstate operation of so many holding companies, there are
many instances where no one State utility commission can
regulate the entire holding company structure. And that is why
we think a Federal presence continues to be necessary. But we
want us taken out.
[Laughter.]
Senator Stabenow. Ms. Marlette, do you want to speak to
that?
Ms. Marlette. I would just say that I would certainly defer
to the States on their abilities. But I do think that S. 206,
the provision that applies to States now, allows them to be
able to reach out of State to other companies' books and
records that they cannot previously reach at this time, which
would help a lot.
Senator Stabenow. Thank you, Senator Enzi.
Senator Enzi. I want to thank this panel. It was very nice
of you, Mr. Commissioner, to take the time to come and share
this.
Mr. Hunt. Thank you, Senator Enzi.
Senator Enzi. And Ms. Marlette, we really appreciate the
perspective that you provided from the Federal Energy
Regulatory Commission.
Ms. Marlette. Thank you, Senator Enzi.
Senator Enzi. There may be additional questions that will
be directed to you. We will leave the record open for that
possibility.
Thank you very much.
Mr. Hunt. Thank you.
Ms. Marlette. Thank you.
Senator Enzi. Our next panel will be: Mr. David M. Sparby,
Vice President for Government and Regulatory Affairs, Xcel
Energy, Incorporated; Mr. David Sokol, Chairman and CEO of
MidAmerican Energy Holdings Company; and Mr. Charles Acquard,
who is the Executive Director of the National Association for
State Utility Consumer Advocates. Is that NASUCA?
Mr. Acquard. Yes.
Senator Enzi. Okay. Mr. Sparby.
STATEMENT OF DAVID M. SPARBY
VICE PRESIDENT FOR GOVERNMENT AND
REGULATORY AFFAIRS, XCEL ENERGY, INCORPORATED
Mr. Sparby. Senator Enzi, Members of the Subcommittee,
thank you for the opportunity to be here this morning.
I am Dave Sparby, Vice President of Government and
Regulatory Affairs for Xcel Energy.
Xcel is a registered holding company that serves about 5
million customers at retail in 12 States, including Wisconsin,
Wyoming, North and South Dakota, Colorado, New Mexico,
Minnesota, Michigan and Texas.
We also own most of NRG, which is an independent power
producer across the United States.
My purpose today is to recommend the passage of S. 206, to
urge its passage as soon as possible, and to make this part of
an ongoing effort to address this Nation's energy shortfall.
Many regions in which Xcel participates are in need of
additional transmission and generation investment over the next
few years.
The capital requirements associated with these projects are
very significant. For many of these customers, the need for
additional facilities will come much sooner.
Although the demand for electricity, the regionalization of
the power industry, the insufficient utility investment over
time has been seen in California, the combination of these
events is affecting an increasing number of markets beyond
California's borders.
Although I appreciate the hardships faced by Californians
this past January during the periods of rolling black-outs, I
can say that similar outages would have far more serious
consequences when you serve climates like North Dakota's this
past January, that registered temperatures well below zero on
days they had electric curtailments in the southwest.
Now although we have not seen the black-outs that the
southwest has experienced, we have seen the cost of procuring
electricity reaching prices many times its historic peaks.
The sustained price hikes hit our communities hard and at a
time during low agricultural prices, a difficult rural economy
and an economic slowdown area also taking place.
A good example of what we are seeing is our experience in
procuring power for Cheyenne, WY this past year. Cheyenne
purchases and distributes electricity to the City of Cheyenne
and much of Laramie County, WY.
Now although the western market in the past has allowed us
to procure energy at prices less than 3 cents a kilowatt hour,
this year, similar market prices were more than 4 times that
earlier cost. When we were not able to purchase power on
acceptable conditions, we responded by entering into
arrangements to permit the construction of new facilities.
However, even the briefest exposure to prices of these
magnitudes have severe adverse and long-lasting consequences on
customers and communities. These problems are stretching well
beyond Wyoming and affecting other communities as well.
There are some bitter ironies, however, for citizens of
Wyoming to pay these kinds of prices, Wyoming sits on more than
400 billion tons of coal, huge reserves of natural gas and
other resources.
Clearly, we need to repeal those policies that inhibit the
development of this energy and incent companies to make
investments necessary to develop these resources. The passage
of S. 206, with its consumer safeguards, is an important
element of this plan.
Today, PUHCA impedes the investment from nonutility
companies who may choose to acquire regulated utilities. It
limits investment in retail facilities at odds with the
policies of other agencies working to develop a competitive
market. It imposes a costly, unnecessary regulatory burden on
companies. Legislative proposals considered today will benefit
all the stakeholders in this industry.
In conclusion, let me say that I recognize the passage of
this bill will not result in lower prices for customers
immediately. We are a long lead-time industry. But the bill
represents an important part of a long-term strategy to ensure
that we not only have an adequate supply of energy, but that it
be abundant.
Thank you.
Senator Enzi. Thank you. Mr. Sokol.
STATEMENT OF DAVID L. SOKOL
CHAIRMAN AND CEO
MIDAMERICAN ENERGY HOLDINGS COMPANY
Mr. Sokol. Senator Enzi, Members of the Subcommittee, my
name is Dave Sokol. I am the CEO of MidAmerican Energy Holdings
Company, which is headquartered in Des Moines, IA, and with
approximately $11 billion in assets.
We are here today representing both MidAmerican and other
exempt utility holding companies that support S. 206.
Our company consists of four major subsidiaries--our
CalEnergy division is a gas-fired generator of electricity and
one of the largest geothermal and renewable energy providers in
the United States.
MidAmerican Energy is a regulated electric and gas utility
serving primarily Iowa, but also parts of South Dakota,
Illinois, and small parts of Nebraska.
Our two other subsidiaries are Northern Electric, a large
electric and gas utility in the United Kingdom, and our home
services division, which is a real estate company which
operates in nine States, including Maryland, Kentucky, and
Indiana.
Last year, our largest investor, Warren Buffett, and I
discussed PUHCA repeal with several congressional leaders. We
warned that the electricity sector was headed for a train wreck
in either California or the upper Midwest.
We do not take any pleasure in being correct in that
prediction. We do hope that you will understand why we believe
so strongly that Congress must act now. The numerous and
complex causes of the California energy crisis can be tied to
two core problems--the lack of adequate investment in
infrastructure and regulatory policies that distort energy
markets.
PUHCA did not stop the problems in California from
occurring, but in certain respects, they actually have
exacerbated them.
The law should be repealed and only Congress can do so. To
do otherwise would leave a Federal statute on the books that
will continue to inhibit investment and distort markets
throughout this country. Let me give you two concrete examples
of how PUHCA is limiting investment in the energy
infrastructure of California.
Last summer, when we saw signs of severe problems in
California's electricity market, we wanted to make several
investments in existing utility infrastructure, but were
blocked by the Public Utility Holding Company Act.
MidAmerican is exempt from the most intrusive regulatory
restrictions of the Act because our regulated utility business
is primarily in one State--Iowa. However, we cannot acquire
more than 4.9 percent equity in any California utility without
running afoul of certain PUHCA roadblocks.
For example, the physical integration requirements of PUHCA
would have required us to demonstrate that we could physically
interconnect our Iowa utility system with those of the
California utilities. This is obviously an impossible standard
for us and the other two-thirds of the American utilities
operating east of the Rockies in the United States to meet.
Moreover, the standard simply makes no sense today.
Second, even if we could have met the physical integration
requirements, we would have been forced to become a registered
holding company under the Act, which would have required us
either to separate ourselves from Berkshire Hathaway, or to
have Berkshire Hathaway divest all of its nonenergy assets.
Obviously, neither option is acceptable.
Take a moment to reflect on the absurdity of this--a
Federal law enacted nearly 65 years ago with the intent of
protecting investors keeps Berkshire Hathaway, one of the only
AAA entities in the world, from investing in California's
utility markets when the State's own utilities cannot even pay
their bills. Let me give you another example.
We wanted to double the size of our geothermal facilities
in the Imperial Valley of California to provide desperately
needed electricity to the California market. Again, PUHCA
stands in the way. A new transmission line is needed which
California's investor-owned utilities are in no financial
condition to undertake. We cannot do it because of PUHCA.
California's utilities will have a difficult time raising
capital for new infrastructure, yet PUHCA prevents most
utilities and impedes most nonutility companies from meeting
the extensive transmission needs in that State and limits
opportunities for investment in new generation. Without S. 206,
where will the needed capital come from?
The most likely scenario, we believe, is from foreign
utility companies looking for a foothold in the United States.
These companies are not restricted by the physical integration
requirements of PUHCA on their first-bite entry into the
American market. So they enjoy a substantial advantage over
U.S. companies in the merger and acquisition market.
I am not making a case against international investment. In
fact, we strongly support it. But outdated, unnecessary laws
should not hamstring American companies in this competition.
Are there any good reasons not to repeal PUHCA? No. It made
sense when it was enacted 66 years ago, when the SEC was in its
infancy and there was no other statutory framework to control
the misuse of the holding company structure. Today, however,
that has changed. FERC and State commissions now closely
regulate investor-owned utilities and will have more authority
under S. 206.
As a result, PUHCA today is extraneous. It is an overlay of
duplicative legislation that restricts healthy investment and
creates no real value for consumers. That is why the SEC, the
agency charged with enforcing PUHCA, has sought to repeal PUHCA
for almost 20 years. PUHCA repeal will make it much easier for
FERC to continue policies to promote efficient, competitive
wholesale markets. For example, while PUHCA is premised on
geographically limiting utility companies, FERC is working to
reduce market concentration.
PUHCA repeal is clearly proconsumer. Repealing PUHCA will
allow new investment, new ideas, and new efficiencies in the
electric and gas industries at a time when they are needed
most.
A study we commissioned last year by the highly respected
econometrics firm of Analysis Group/Economics used very
conservative estimates to show that PUHCA directly costs the
American economy hundreds of millions of dollars annually.
Other surveys put the lost opportunity costs in the industry in
the many billions. Why then has PUHCA not been repealed?
Because it is being held hostage to the larger electricity
debate. Other stake-holders in the industry use PUHCA repeal as
leverage to achieve their goals in energy policy. We believe it
is time to end this stalemate because the losers in this hard-
played game over PUHCA repeal have been America's energy
consumers.
The last point I would like to make is Mr. Sarby's company,
Xcel Energy, is a registered holding company, subject to the
most stringent restrictions of PUHCA.
In spite of the fact that our companies are regional
competitors on the wholesale market, we fully support his
company being removed from PUHCA's onerous restrictions. He
supports our company being able to expand beyond our limited
geographical scope.
By removing both of our companies from PUHCA restraints,
you will enable each of us to compete more aggressively,
operate more efficiently, and serve customers better. We urge
your support of
S. 206. Thank you.
Senator Enzi. Mr. Acquard.
STATEMENT OF CHARLES A. ACQUARD
EXECUTIVE DIRECTOR, NATIONAL ASSOCIATION OF
STATE UTILITY CONSUMER ADVOCATES (NASUCA)
Mr. Acquard. Thank you, Senator Enzi.
I do not know if we are going to solve anything here today,
but one thing we have learned is that your 4th grader is the
only child who knows anything about the Public Utility Holding
Company Act, and I commend her for that.
[Laughter.]
Good morning, Senator Enzi, and Members of the
Subcommittee.
I am Charlie Acquard, Executive Director of the National
Association of State Utility Consumer Advocates, or NASUCA.
NASUCA is an association of 41 consumer advocate offices in
39 States and the District of Columbia. Our members are
designated by the laws of their respective States to represent
the interests of mostly residential consumers before State and
Federal regulators and in the courts.
Some of my members are divisions of State attorneys general
offices and some are independent State agencies. Many of the
heads of the offices are appointed by governors of States and
in many cases, confirmed by the State's legislative body.
On behalf of the members of NASUCA, I wish to thank you for
the opportunity to testify before this Subcommittee on the
Public Utility Holding Company Act.
The question before this Subcommittee today is on the
future of PUHCA. Yet, this issue cannot be examined outside the
context of the entire framework of the electric utility
industry without considering the market implications for
consumers and competitors alike. No one has to tell this
Subcommittee that the electric utility industry is in the midst
of substantial change, uncertainty, and, in some places,
turmoil.
It is a front-page, 6 p.m., lead news story. Anybody
involved with this industry cannot escape the over-the-
backyard-fence or soccer-sidelines inquiries from concerned
neighbors.
Up until recently, whenever I was asked at a gathering
about what I do for a living, silence followed and the subject
was then quickly changed. Now a crowd gathers and I get a lot
of questions about the possibility of the crisis in California
happening in Maryland, where I live. For the first time I can
remember, people are worried about their lights coming on when
the switch is flipped.
Examination or possible elimination of key industry
underpin-nings can no longer be done in a vacuum or viewed
through a narrow jurisdictional prism that this is simply a
securities regulation issue. Rather, any discussion of
substantial alteration or repeal of PUHCA must be considered in
the context of the potential impact on industry structure,
market power, and ultimately, consumers.
PUHCA has been on the minds of consumer advocates since the
origins of NASUCA as an organization. In a series of
resolutions dating back almost 20 years, NASUCA has urged
Congress to exercise the greatest caution in responding to
efforts to dismantle the consumer protections contains in
PUHCA.
We are not Luddites. We have negotiated many of the
existing changes to PUHCA, including the gas-related activities
act.
But NASUCA continues to oppose changes to PUHCA that would
reduce consumer protections in the Act at this time. NASUCA
urges Congress and the SEC not to take any action that would
weaken the Act without first ensuring that public utility
holding companies are either subject to effective competition
or subject to effective regulation, where effective competition
does not yet exist or competition would not induce efficiency,
reduce cost, and advance consumer interest.
Our resolutions recognize that public utility holding
companies and their subsidiaries are affected with the national
public interest and that their activities extending over many
States are not susceptible to effective control by any
individual State. We also recognize that neither the electric
industry, nor the natural gas industry, has a fully competitive
market structure and that utility market power remains
pervasive.
Therefore, we conclude if PUHCA were repealed today in the
manner proposed in S. 206, neither the remaining regulatory
scheme, nor the current state of competition would be
sufficient to protect consumers.
Specifically, if PUHCA were repealed, consumers would face
increased risk from diversification. PUHCA discourages
diversification into nonutility business and regulates capital
structure.
Without these consumer protection provisions, holding
companies could diversify into risky ventures, pledging utility
assets as collateral, and loaning funds from utility operations
to nonutility affiliates. The last thing consumers need is the
dot-comming of America's electric utilities. Consumers would
also have last choice, as the SEC testified to.
If PUHCA is repealed on a stand-alone basis, the industry
is likely to be dominated by a few large companies wielding
incredible market power. If California has taught us anything,
it is that a vibrant, competitive wholesale market is needed
for retail competition to succeed. Competitive markets need a
multiplicity of participants, not just a couple of two-ton
utility gorillas.
Finally, in response to your question regarding how the
repeal of PUHCA may help alleviate the current energy crisis,
the short answer is that it would not. For the most part, the
current energy crisis is caused by a shortage of supply. PUHCA
is not an impediment to building power plants. In fact, the
Energy Policy Act of 1992 specifically includes a PUHCA
exempted for EWG's or exempts wholesale generators.
Proponents of stand-alone PUHCA repeal argue that the
statute is no longer needed, that this is a Depression-era
relic. They say, in 60 some odd years since its passage,
securities regulation and State commissions have matured.
But NASUCA believes that, as John Dingell once said, times
have changed, but human nature has not. Businesses will always
seek market dominance in an attempt to squash competition. Mid-
managers to chairmen of the boards are handsomely rewarded when
they do so.
But in an essential services industry, where monopoly power
will continue to at least dominate the distribution and
transmission functions, continued structural protections are
needed to ensure that consumers are not left holding the bag.
Thank you for the opportunity to be here today and I look
forward to any questions that you may have.
Senator Enzi. Thank you. I will defer to Senator Gramm
Chairman of the Banking Committee who is with us now, for any
statement or questions he wants to ask.
STATEMENT OF SENATOR PHIL GRAMM
Senator Gramm. Well, Senator Enzi, let me thank you for
this excellent hearing. I am sorry I missed the first panel. I
was over working on the floor. I got to hear most of the second
panel.
I want to thank everybody for participating. I want to
thank you, Senator Enzi, for your leadership on this issue.
Senator Shelby and I first discussed PUHCA repeal when we
were Democrats----
[Laughter.]
Members of the then-Energy and Commerce Committee in the
House of Representatives. We were sitting next to each other
when this subject was first discussed.
Senator Shelby. 1979.
Senator Gramm. And that was in 1979. Senator Shelby has
been a leader on this effort ever since.
I believe the year has come to repeal PUHCA. I plan to hold
a mark-up on this bill, perhaps as early as next week. We have
reported it in the past, but other issues have ended up
interfering with it.
There has been a belief that this was helpful, that this
was a positive thing to do. But there was some other thing that
was more important that might be used, that we might use PUHCA
as a rider for.
And I am reminded of that old poem that went:
Truth worth is in being, not seeming--
In doing, each day that goes by,
Some little good--
Not in dreaming
Of great things to do by and by.
I just want to say to those who have been a leader on this
effort, that this is the year that we are going to repeal
PUHCA. This is the year that--there is not any other issue
bigger that we have any chance of getting a consensus on.
This is a thing that, it seems to me, needs to be done. And
I want to pledge myself to an all-out effort this year to
repeal this bill. Hopefully, PUHCA is in its last year of life,
2001. And I want to thank you, Senator Enzi.
Senator Enzi. Thank you.
Senator Corzine.
Senator Corzine. I just want to thank Senator Enzi for
giving
me the opportunity to come after Senator Gramm with regard to
this issue.
[Laughter.]
I do not have any poetry to recite. I do want to ask a
question, however, of Mr. Acquard.
It was noted in your testimony that you would argue that
there are places where affiliates' books and records would be
exempted from review.
We heard in the first panel that we had security that FERC
would have the ability to check the inter-affiliate
transactions. Do you want to talk a little bit about where you
think exclusions are and what the implications of those
particular exclusions might be?
Mr. Acquard. Yes. I do not want to minimize the importance
of the books and records provision. I want to praise Senators
Shelby and Gramm for including those. There is a lot of good
provisions in this bill and I think we have seen an improvement
over the years of the holding company act.
I am also pleased to say that there is no doubt that you
want to continue to protect consumers, although you want to
repeal PUHCA. So there is that consensus that there needs to be
some sort of action taken to protect consumers if the holding
company act is repealed. Where we differ is that, once you do
that, is that going to be effective?
Now books and records can be effective, and that is good.
But that means that you are going to have to chase after a
holding company that has done some wrong, and that is very
difficult.
The question was raised earlier in the hearing whether or
not the Commissions have the resources to do it, no matter what
the statutory regulations that they have. I cannot speak for
the Commissions, but I can speak for the consumer advocate
offices.
About half of my members have 10 staffers or less and over
half of my members have budgets of a million dollars or less.
So we do not have a whole lot of resources to chase after. That
is why we support continuing these structural protections, to
prevent the harm from happening in the first place.
So, yes, books and records are important. We believe there
would be some holes in that. But, even if there were not, it
would be difficult to regulate multistate holding companies
because of limited resources.
Senator Corzine. What are some of those exemptions? Are
there specifics that you were alluding to here?
Mr. Acquard. I would be happy to file that with you.
Senator Corzine. It strikes me that the overlapping
regulation may very well be part of the problem in the ability
to actually get at the kinds of consumer protections you want
because I am not clear who has responsibility here.
We need to make sure that the law has that ability, in my
view, to get at books and records adequately. And I would be
concerned that your argument is that it is not adequate.
Senator Enzi. Senator Bunning.
Senator Bunning. Thank you, Senator Enzi.
Mr. Acquard, it is extremely rare that a Federal agency
willingly concedes regulatory authority or oversight to another
agency.
Why would the SEC willingly concede jurisdiction to FERC if
there is such concerns about PUHCA repeal? Why do the SEC and
FERC not share the same concerns that you have?
Mr. Acquard. Well, concerning the SEC willing to give up
their authority to the FERC, I think the SEC has always been a
bit uncomfortable regulating the Public Utility Holding Company
Act because they are essentially a securities regulator.
So much more of the Act has to do with energy policy than
just securities regulation. So I think they see it that FERC,
because they have the knowledge to deal with the energy issues,
that they would be a better regulator of that. And we would not
disagree with that.
One of the positive things about the legislation is
shifting some of the authority from the SEC to the FERC. The
SEC has not done a very good job regulating the Act.
But the beauty of the Act is that it prevents these
activities, these corporate structures, from taking place in
the first place, so that the SEC never had to do anything and
it still works. So as far as the FERC believing that they have
adequate authority, you will have to ask them.
Senator Bunning. We just did. And they just said that they
had adequate authority.
Mr. Acquard. We would disagree.
Senator Bunning. You disagree.
Mr. Acquard. And it is not just us. I think the letter that
was sent to the Subcommittee to the commissioners, they say
there are some limits of authority. And there is a list of a
whole bunch of groups, from the AFL-CIO----
Senator Bunning. I understand that. I can get you a list
from the other side that says that we should repeal this and
repeal it promptly. So we do not want to get into that debate.
You are not going to win and I am not going to win on that
debate because we will match the same list.
Let me also ask----
Senator Shelby. Senator Bunning, I believe you would win.
[Laughter.]
Senator Bunning. You think I would win? Because I would get
the last word?
[Laughter.]
Let me ask a question to our other two witnesses. In your
companies, what portion of your power production is in natural
gas, nuclear, and coal-fired generation?
Either one.
Mr. Sokol. Let me start. Roughly 15 percent of our
generation is nuclear.
Senator Bunning. Fifteen?
Mr. Sokol. Yes. 45 percent is coal. Roughly 25 percent is
gas. And the remainder is renewable energy.
Senator Bunning. In other words, renewable energy being
hydroelectric?
Mr. Sokol. Geothermal and wind.
Senator Bunning. Okay.
Mr. Sparby. Sir, for Xcel energy, it is a little more than
50 percent by coal, about 30 percent of our megawatt hours are
nuclear, the rest is purchases, as well as renewable energy.
Senator Bunning. Let me ask, can we get back to the
California debacle? We talked about some problems that PUHCA
might have played in the exacerbation of the problem there.
But didn't the local jurisdiction, their local regulatory
commission in California, cap retail rates and let wholesale
rates go unfettered? In other words, to seek the level of
competitive advantage
or disadvantage?
Mr. Acquard. Yes.
Senator Bunning. Wasn't that more of a problem than
anything else that might have occurred in California?
Mr. Acquard. There were a number of problems that occurred.
But that was one of the major ones, yes.
Senator Bunning. And now, we are looking at approximately a
40-percent increase in retail rates to match those costs that
the wholesale rates have created.
If in fact, California would not have reduced production of
energy in California and made the decision to go outside of
California to buy their power, don't you think that would have
at least alleviated some of the problems that they are having
there?
Mr. Acquard. That would have. But I do not think that is
necessarily a holding company issue.
Senator Bunning. No, no. It is not a holding company--I am
trying to concentrate on California and the problem that they
had by not being able to go in due to PUHCA and not compete
for, because they were certainly based in a different area.
Mr. Acquard. Well, I would look at the California crisis,
if you look at sort of the broad scope, is that it is an
instance where there was deregulation or the consumer
protections of regulation were removed before there was a
vibrant competitive market, and that might have caused some of
the problems.
And that is sort of what we are talking about here with the
Public Utility Holding Company Act. We do not have a vibrant
wholesale market and we are talking about removing some of the
consumer protections found in PUHCA. We believe it is
premature.
Senator Bunning. We disagree that there is a vibrant
wholesale market and by repealing, we will have a more vibrant
one.
Thank you, Senator Enzi.
Senator Enzi. Senator Shelby.
Senator Shelby. Mr. Sokol, Mr. Sparby, just for a minute
hazard a guess, if you would, as to how much your industry has
changed since PUHCA was enacted in 1935. I would hazard myself
that neither one of you were born then.
Mr. Sokol. I think you are correct for both of us.
Senator it has changed as much as the computer industry has
changed in the last 20 or 30 years.
Senator Shelby. Absolutely. I think it is important for you
two to put this in a current context. Go ahead. I did not mean
to interrupt you.
Mr. Sokol. I think some simple examples would be that
electricity is produced today with one half the amount of raw
energy, whether it is natural gas, coal or others, than it took
just 30 years ago in modern technology.
Senator Shelby. Yes.
Mr. Sokol. The majority of that has been caused by, in
fact, legislation passed in the late 1970's which created a
level of generation competition in this country.
Senator Shelby. You are talking about PURPA.
Mr. Sokol. Correct. The other thing that has happened is,
virtually every State--well, every State in the country today
has a regulatory body that oversees regulated activity in that
State of electric and gas. Now that did not exist in 1935. And
there are a number of other examples.
If I might just take one moment and defend the SEC staff in
their activities in handling PUHCA in the last 10 years during
dramatic change.
That law, if it is read in its entirety, makes no sense
today. It regulates an industry that ended in 1965, in our
view. But the SEC has done a tremendous job of trying to find
ways to work around it. But the reality is that those ways----
Senator Shelby. Needs some legislation. And that is what
they are saying here, is not it?
Mr. Sokol. They absolutely do, yes, sir.
Senator Shelby. Mr. Sparby.
Mr. Sparby. Yes, Senators Enzi, and Shelby.
Senator Shelby. I know you were not around in 1935.
[Laughter.]
Mr. Sparby. Well, that is very kind for you to say that.
That Act contemplated very much an isolated, vertically
integrated industry that looked very much unlike what we have
today--an industry that is much more aggregated and organized
in a horizontal fashion, as well as much more interconnected
and regional than that Act's drafters could have ever imagined.
Senator Shelby. In 1935, I am sure the people that enacted
the legislation then could never imagine the production of
electricity that you alluded to a minute ago, with half the raw
materials, and so forth, could they?
Mr. Sokol. The electricity industry was in its infancy in
the late 1920's, early 1930's. And the reality is, the history
of the 1935 Act was in response to some very devious steps that
were taken after the beginnings of the Depression for people to
try and use utility assets to offset losses in their holding
companies elsewhere in their empires, if you will. And the Act
was a direct response to that and it was an appropriate one at
the time.
That cannot exist today. We fully support the books and
records issues. Those elements of our business that are
regulated must be available to public regulators to be
absolutely certain that customers are protected because it is
an essential service.
Our industry has no issue with that at all. In fact, our
shareholder, Mr. Buffett, said it very well last year when he
said the utility industry can never be a great business. It
should only be a good business if it is run well because
everybody depends upon it.
In the State of Iowa----
Senator Shelby. But it is essential to our economy, isn't
it?
Mr. Sokol. It is absolutely essential. In the State of
Iowa, all of our books and records, the holding company and
their regulated utility, are available to that regulator. They
should be and we have no opposition to every State having that.
And I believe today virtually every State does have that
requirement.
Senator Shelby. Mr. Acquard, Ms. Marlette earlier, I think
you were here, the FERC's witness today, felt that FERC would
be able to protect rate-payers upon repeal of PUHCA.
Do you differ with that?
Mr. Acquard. Well, I think FERC has a role implanted. But I
do not think they have the adequate authority that they need,
nor do the States. And again, I would like to emphasize that I
think you have a letter from the State regulators themselves
saying that you need some additional things.
I was also interested to hear----
Senator Shelby. I would have to agree with you. I think the
State regulators do have a role.
Mr. Acquard. Right.
Senator Shelby. And I think Mr. Sokol and Mr. Sparby
alluded to that, didn't you?
Mr. Sokol. Absolutely.
Mr. Acquard. I was interested in the testimony from the
SEC, however, saying that maybe some additional authority is
needed to check on cross-subsidies and other sort of market
power abuse. And we would be delighted to work with the SEC and
with this Committee to come up with some on this legislation.
Senator Shelby. Isn't more capacity generally one of the
keys, maybe not the only key, and adequate distribution, to
bring the prices down?
It is in just about everything else. If you look at energy
as a commodity, the more capacity you have, the better
distribution you have, that brings competition in itself, in a
way, doesn't it, Mr. Sparby?
Mr. Sparby. Absolutely. We have seen markets, Senator
Shelby, that have benefited significantly by not having just
enough generation, but having enough generation that we have a
truly robust and vibrant and competitive wholesale market. And
that is the target we are shooting for.
Senator Shelby. Thank you very much, Senator Enzi.
Senator Enzi. Thank you.
Senator Shelby. For holding this hearing, too.
Senator Enzi. We appreciate you bringing the issue to the
Committee so that we could have the hearing. And I want to
congratulate you on your efforts.
Senator Shelby. Thank you.
Senator Enzi. Senator Bayh
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you, Senator Enzi.
I would like to thank all three of our witnesses for coming
here today to appear before this Committee. I apologize. I
missed the first part of your testimony.
I had, as is usual in the Congress, a variety of issues
trying to juggle at one time--education reform, campaign
finance reform, as well as some others. So I do appreciate your
time.
I have three very brief questions. First, Mr. Acquard, you
have spoken with great passion about the importance of
protecting the consumer interest, which of course is something
that we would all be interested in.
We have also heard testimony from Mr. Sokol that in his
company's case, this PUHCA actually prevented them from making
some important investments in California that at least in part
might have helped to alleviate some of the problems that exist
there today. I assume that there are other companies similarly
situated that might have made similar investments. Given that
as a fact, how is such a restriction in the consumer interest?
Mr. Acquard. Well, again, it goes back to--in this specific
case, it may have been a problem. It may have caused some
problems in California. But if you look at the overall, as far
as corporate structural restrictions, we believe that those
restrictions are as important today as they were 65 years ago,
when the Act was enacted during the Depression.
Those are the sort of--holding companies, by their very
nature, are difficult to regulate. And once you form a holding
company type system and you move from just an intrastate
utility to an interstate utility, that becomes very difficult
to regulate.
Will Rogers used to say that a holding company is where you
stash the goods when the police frisk you down.
[Laughter.]
I think there is some truth to that. I would say that,
while there are instances where perhaps there may be an
impediment to doing some good things, overall, the structure is
better for consumers.
Senator Bayh. My mother is from Oklahoma. I know a thing or
two about Will Rogers. He also once said, if my colleagues will
forgive me, that you can lead a man to Congress, but you cannot
make him think.
[Laughter.]
So perhaps we should quote Will Rogers with some----
Senator Shelby. Anything.
Senator Bayh. That is right. In any event, just a couple of
other questions. I think Senators Bunning, and Shelby alluded
to this. You have answered my question in part about the
adequacy of current State and SEC regulation.
I gather the FERC and the SEC witnesses--previously, I know
they have. I gather today they reiterated their belief that the
current State structure is sufficient. And you suggested that
there was a letter from the State regulators. I have not had a
chance to read this letter.
If you have, Mr. Acquard, what about the current regulatory
scheme, since the SEC and the FERC seem to believe it is
adequate, what about the scheme is inadequate?
Mr. Acquard. The current scheme?
Senator Bayh. The current scheme of State regulations that
has grown up over the years, the FERC's ability. I gather the
State regulators believe it is inadequate.
Do you share their view that it is inadequate?
What about it is inadequate?
Mr. Acquard. Right. Well, I believe--and it is hard for me
to speak for the State regulators. I was surprised not to see a
representative from the State commissions up here today.
What the commissions are saying, I believe, is that if you
do repeal the Holding Company Act and you do allow a growth of
holding companies--and you will see that that is guaranteed--
then their job is going to get more difficult. It is difficult
as it is now. It is only going to get worse if the Act is
repealed.
Senator Bayh. My final question would be to Mr. Sokol and
Mr. Sparby. Could you respond to Mr. Acquard's comments about,
if PUHCA is repealed, his belief that the consumers would be
left on the hook here?
Could you give us your insights into why you think----
Mr. Sokol. With all due respect, it is a complete red
herring.
We are a holding company today. We hold a utility in the
State of Iowa that services small territories in South Dakota,
Illinois and Nebraska. The State has full access to books and
records. The State completely ring-fences the utility assets in
Iowa. We cannot, nor can any other utility in the United States
that we are aware of, pledge utility-regulated assets to
support any credit activity in any other part of the holding
company.
The only thing we cannot do today is own another utility in
another State. We can own any other type of company. We can do
virtually anything else we want to do.
The States do very carefully oversee the fact that we
cannot move assets out of Iowa, nor should we be allowed to.
The consumers effectively own those assets through their rates.
It is not an issue.
One issue, though, and you alluded to it earlier in your
comments, that is very important, is that the conflict today
between PUHCA, regional transmission operating companies, and
FERC Order 2000, they are directly in conflict. They shouldn't
be because we desperately need--one of California's problems,
no question, they created the problem themselves.
But to help California get out of the problem, transmission
corridors are absolutely essential. And virtually no one
outside the State of California can invest and solve that
problem under today's regulations. And that is a serious
mistake.
Senator Bayh. Thank you very much. Mr. Sparby, briefly. I
see my time is expired.
Mr. Sparby. Yes, Senator Bayh. I agree that there are no
holes here created by this bill.
The appropriate State or regulator has full authority here
to take a look at what costs go into rates. They have done that
in the past. They will continue to do that after the passage of
this bill. And I agree that there is certainly nothing
presented here, nor nothing suggested, to make us think
otherwise.
Senator Bayh. Thank you, gentlemen.
I would just say in conclusion, so much has changed. I
guess Senator Gramm has left. Not only was I not in existence in
1935, I am not sure my parents were in existence in 1935 when the
rate was adopted.
So much has changed since then. We are going to have a
national, in some cases, global, marketplace for energy. And I
think that one of the lessons coming out of California is you
believe in markets or you do not.
Mr. Acquard, I believe your point about the importance of
efficient, robust markets is accurate. But they come in all
sizes, shapes and descriptions, depending upon the
particularities of the marketplace we are talking about.
More investment, more participants are going to provide, in
the long run, better choices for consumers, better quality
products at lower cost. And I have to say that, in many
respects, it is my impression that this legislation is
antiquated and is keeping us from achieving some of those
objectives.
While I share your commitment to the consumer interest, I
think in the long run, a robust, open free market is going to
in most cases get us to that consumer interest, without being
naive that in some circumstances, important protections need to
be maintained.
Thank you, Senator Enzi.
Senator Enzi. Since I deferred to Senator Gramm, I still
have my opportunity to ask questions here.
And I would like to welcome Mr. Sparby to Wyoming. You are
a new owner of an old business--Cheyenne Light Fuel and Power
has been one of the old companies.
Many people probably do not realize that Wyoming was the
first State to have a town with incandescent street lights.
That is right up there with the other firsts that Wyoming has
that people also do not know about.
[Laughter.]
But one of the city's main points to attract businesses has
been its low-cost power. Beginning in February, reports started
coming in that Cheyenne electricity rates would possibly more
than double overnight.
I know that your company just recently purchased Cheyenne
Light Fuel and Power. But I am also aware that your company was
involved in the negotiations when the contracts with PacifiCorp
expired in December. And your company will be responsible for
negotiating the rate increases with the Wyoming Public Service
Commission. Would the repeal of PUHCA make any difference to
the Cheyenne consumers?
Mr. Sparby. Senator Enzi, I believe it would over the long
run. The difficulty with the energy supply today is that it is
hindered by numerous limitations, none of which you can point
to and say, would the repeal or the amendment of that
modification fix today's energy shortfall?
But looking at each one of these regulations, addressing
them individually and doing it as soon as possible, I believe
will result in lower costs and more generation over the long
run.
Senator Enzi. Do you think that Wyoming will be able to
adequately administer the regulation when PUHCA is repealed?
Mr. Sparby. Yes, I do, Senator. I have found that the
Wyoming commission has been very aggressive about its ability
and inquiries into not only this proposed rate change, but all
others, and have not been inhibited, nor found limitations that
I am aware of, imposed by PUHCA.
Senator Enzi. Mr. Acquard, you mentioned Will Rogers. I do
not think that Will Rogers ever had to work with FERC.
[Laughter.]
In your testimony, you first said that S. 206 does not have
adequate regulation. And then you said that it increases the
regulatory burden.
Do you want to explain that conflict?
Mr. Acquard. Well, I believe what I said is that S. 206, by
repealing the Public Utility Holding Company Act, submits these
companies to the regulations of each 50 States. And so, that
would increase the burdens on the utilities.
Senator Enzi. One of the things that was mentioned both by
FERC and the SEC earlier was the redundancy that there is in
regulation by having this now.
Doesn't that redundancy cost consumers?
Mr. Acquard. There may be some redundancy in the Act. And
again, we are not opposed to reform of the Act. However, we do
believe that there continues to be a Federal role in the
regulation of multistate holding companies. And that
redundancy, we believe, does have consumer benefits, if there
is any.
Senator Enzi. Mr. Sokol, one of the biggest fears that I
hear from PUHCA repeal opponents is that PUHCA repeal will lead
to the acquisition of utilities by nonutility companies and
that that would lead to some abuses of transferring the costs
of one company to rate-payers that PUHCA was initially created
to avoid. If we repeal PUHCA, is that going to happen? Will my
constituents in Wyoming end up paying more?
Mr. Sokol. Senator, not to let my cohort here be outdone, I
am a homeowner in the great State of Wyoming and we buy about
$75 million of your fine coal each year, so as a constituent
the answer is no. In fact, PUHCA has created the odd situation,
again, unintended consequences of legislation being allowed to
exist too long. But it has created the odd situation of really
the only M&A or merger and acquisition activity going on in our
industry is among the industry because investors like a
Berkshire Hathaway are prohibited from owning more than a 10-
percent piece in one utility. And so, I think you are actually
seeing the opposite problem happen, which is a rather
incestuous relationship without additional capital coming in.
And frankly, in the last 2 years, the greatest amount of
capital coming into our sector is from foreign owners, not U.S.
owners. So, no, I do not think there is any concern or real
issue about cross-subsidization. And by the way, it should be
completely prohibited. We have no interest in the consumer
paying more than they should by that consolidation.
On the other hand, this is an industry that, as has been
mentioned, has gone through phenomenal change, but with very
few additional players in it. That is not very healthy, we do
not think.
Senator Enzi. My daughter has even been following those
changes just since the 12 years ago that she was introduced to
it.
[Laughter.]
So I do appreciate the testimony of all of you today and
the way that you have helped to build a record on this
important issue.
Senator Shelby, did you want to make a concluding remark?
Senator Shelby. No, thank you, Senator Enzi.
Senator Enzi. We will leave the record open in case anybody
has additional questions for you, and we would appreciate any
answers promptly from you when you get those.
Thank you, for your participation. The hearing is
adjourned.
Mr. Acquard. Thank you.
Mr. Sokol. Thank you.
Mr. Sparby. Thank you, Senator Enzi.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
[Prepared statements, and additional material submitted for
the record follow:]
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
Senator Enzi, I would like to thank you for holding this important
hearing on the conditional repeal of the Public Utilities Holding
Company Act. As you know, this has been an issue that the Subcommittee
has been working on for a number of years now.
I believe that this legislation accomplishes what should be our
goal in many areas: it consolidates regulation and eliminates
duplication while strengthening consumer protection. Currently, we are
faced with increasingly difficult choices regarding energy. I support
options to promote competition and increase innovation within the
industry, and repeal of PUHCA is a good step in that direction.
The Securities and Exchange Commission, the agency charged with
enforcing this Act, has recommended that the Act be repealed. I find
this particularly telling, since it is so rare that a Federal agency
actually recommends that its regulatory authority be curtailed!
I look forward to hearing from the SEC and other witnesses about
their ideas on what can be done to improve the situation for the energy
industry. I would like to especially welcome Mr. David Sparby, who is
the Vice President for, Regulatory and Government Affairs at Xcel
Energy. Xcel provides power for many of my constituents, and I look
forward to working with David on this and other issues that are
important to the people of Colorado.
Again, thank you all for being here. I look forward to your
testimony.
----------
PREPARED STATEMENT OF SENATOR JIM BUNNING
Senator Enzi, I would like to thank you for holding this hearing,
and express my support for S. 206, The Public Utility Holding Company
Act of 2001.
PUHCA was passed in 1935. Many feel that it is an outdated,
duplicative, law. The original bill was designed to break up the high
concentration of market power among a few holding companies. PUHCA has
done that. But now there are only a few energy companies that are
subject to PUHCA, while many others are not. Many believe PUHCA repeal
will lower costs and allow the companies currently under, to grow and
diversify. They believe it will eliminate burdensome regulations and it
will allow the PUHCA holding companies to compete more effectively.
The Securities Exchange Commission (SEC) supports repealing PUHCA
and shifting the regulatory oversight to the Federal Energy Regulatory
Commission (FERC). If the SEC says FERC is the more appropriate
regulatory agency, I think that is a pretty telling endorsement. I also
believe that FERC, along with State public service commissions, can
protect utility rate-payers and investors.
However, I do understand there are some concerns about repealing
PUHCA and turning over the Securities Exchange Commission's regulatory
powers to the Federal Energy Regulatory Commission. State regulators,
consumer groups and Kentucky heating and electrical contractors have
voiced their reservations about passing PUHCA as a stand-alone bill. I
have heard their concerns and I will listen to the testimony today with
great interest as I decide whether S. 206 is in the best interest of
Kentucky.
Once again, thank you, Senator Enzi for holding this important
hearing.
----------
PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Enzi and Ranking Member Dodd, I want to thank you for
holding this hearing today concerning S. 206, the Public Utility
Holding Company Act of 2001.
This bill, which the Subcommittee has passed with bipartisan
support in each of the last few Congresses, was developed in close
consultation with the Securities and Exchange Commission, the Federal
Energy Regulatory Commission and the State's Public Service
Commissions.
S. 206 is designed to help America's energy consumers by repealing
an antiquated law that is keeping the benefits of competition from
reaching our citizens. Recent events across the country make it very
clear that we are at a time in our Nation's history when we are going
to have to make some critical choices regarding our national energy
policy.
The fact is, future technological innovation and economic growth is
contingent upon this country's ability to meet its ever increasing
demand for energy. In order to do this, we need to modernize production
systems, increase market competition, and strip away unnecessary
regulations. Achieving these goals is going to be a difficult and time
consuming process.
However, repealing PUHCA would be the first step in the right
direction. It has been a very long time since it first became clear
that this outdated, Depression-era law had become a unnecessary
constraint on the ability of American gas and electric utilities to
compete. While the many bipartisan efforts to repeal PUHCA have not
been successful, strong support still exists for its elimination. I
believe that it is imperative that we achieve this goal in the 107th
Congress. Thank you.
----------
PREPARED STATEMENT OF ISAAC C. HUNT, JR.
Commissioner, U.S. Securities and Exchange Commission
March 29, 2001
Senator Enzi, Ranking Member Dodd, and Members of the Subcommittee:
I am pleased to have this opportunity to testify before you on behalf
of the Securities and Exchange Commission (``SEC'') about S. 206, a
bill that would repeal the Public Utility Holding Company Act of 1935
and establish a more limited regulatory framework covering public
utility holding companies. The SEC continues to support repeal of the
Public Utility Holding Company Act of 1935 (``1935 Act'' or ``PUHCA'').
Repeal, however, should be accomplished in a manner that eliminates
duplicative regulation while also preserving important protections for
consumers of utility companies in multistate holding company systems.
Introduction
During the first quarter of the last century, misuse of the holding
company structure led to serious problems in the electric and gas
industry. These abuses included inadequate disclosure of the financial
position and earning power of holding companies, unsound accounting
practices, excessive debt issuances and abusive affiliate transactions.
The 1935 Act was enacted to address these problems.\1\ Because of its
role in addressing issues involving securities and financings, the SEC
was charged with administering the Act. In the years following the
passage of the 1935 Act, the SEC worked to reorganize and simplify
existing public utility holding companies in order to eliminate abuses.
---------------------------------------------------------------------------
\1\ See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
---------------------------------------------------------------------------
By the early 1980's, however, many aspects of 1935 Act regulation
had become redundant: State regulation had expanded and strengthened
since 1935, and the SEC had enhanced its regulation of all issuers of
securities, including public utility holding companies. Changes in the
accounting profession and the investment banking industry also had
provided investors and consumers with a range of protections unforeseen
in 1935. The SEC therefore concluded that the 1935 Act had accomplished
its basic purpose and that many of its remaining provisions were either
duplicative or were no longer necessary to prevent the recurrence of
the abuses that had led to the Act's enactment. The SEC thus
unanimously recommended that Congress repeal the Act.\2\
---------------------------------------------------------------------------
\2\ See Public Utility Holding Company Act Amendments: Hearings on
S. 1869, S. 1870 and
S. 1871 Before the Subcomm. On Securities of the Senate Comm. On
Banking, Housing, and Urban Affairs, 97th Cong., 2d Sess. 359-421
(statement of SEC).
---------------------------------------------------------------------------
The SEC's Study and the Current Environment
For a number of reasons--including the potential for abuse through
the use of a multistate holding company structure, related concerns
about consumer protection, and the lack of a consensus for change--
repeal legislation was not enacted during the early 1980's. Because of
continuing change in the industry, however, the SEC continued to look
at ways to administer the statute more flexibly.
In response to continuing changes in the utility industry during
the early 1990's, and the accelerated pace of those changes, in 1994,
then-Chairman Arthur Levitt directed the SEC's Division of Investment
Management to undertake a study, under the guidance of then-
Commissioner Richard Y. Roberts, to examine the continued vitality of
the 1935 Act. The study was undertaken as a result of the developments
noted above and the SEC's continuing need to respond flexibly in the
administra-
tion of the 1935 Act. The purpose of the study was to identify
unnecessary and
duplicative regulation, and at the same time to identify those features
of the
statute that remain appropriate in the regulation of the contemporary
electric and
gas industries.\3\
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\3\ The study focused primarily on registered holding company
systems, of which there were, at the time of the study, 19. The 1935
Act was enacted to address problems arising from multistate operations,
and reflects a general presumption that intrastate holding companies
and certain other types of holding companies which the 1935 Act exempts
and which now number 119, are adequately regulated by local
authorities. Despite their small number, registered holding companies
account for a significant portion of the energy utility resources in
this country. As of December 31, 2000, the 26 registered holding
companies owned 214 electric and gas utility subsidiaries, with
operations in 44 States, and in excess of 1,500 nonutility
subsidiaries. In financial terms, as of December 31, 2000, the 30
registered holding companies owned more than $404 billion of investor-
owned electric and gas utility assets and received in excess of $160
billion in operating revenues. The 30 registered holding companies
represent over 40 percent of the assets and revenues of the U.S.
investor-owned electric utility industry, and almost 50 percent of all
electric utility customers in the United States.
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The SEC staff worked with representatives of the utility industry,
consumer groups, trade associations, investment banks, rating agencies,
economists, State, local and Federal regulators, and other interested
parties during the course of the study. In June 1995, a report of the
findings made during the study (``Report'') was issued. The staff's
Report outlined the history of the 1935 Act, described the then-current
state of the utility industry as well as the changes that were taking
place in the industry, and again recommended repeal of the 1935 Act.
The Report also outlined and recommended that the Commission adopt a
number of administrative initiatives to streamline regulation under the
Act.
The utility industry in the United States has continued to undergo
rapid change since publication of the report. Some of these changes
have been facilitated by Congress. Specifically, as a result of
recently-created statutory exemptions, registered holding companies are
now free to own exempt wholesale generators and foreign utilities and
to engage in a wide range of telecommunication activities.\4\ In
addition, the SEC has implemented many of the administrative
initiatives that were recommended in the Report.\5\
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\4\ Sections 32 and 33 of the Act, which were added to it by the
Energy Policy Act of 1992, permit, subject to certain conditions, the
ownership of exempt wholesale generators and foreign utility companies.
Section 34, which was added by the Telecommunications Act of 1996,
permits holding companies to acquire and retain interests in companies
engaged in a broad range of telecommunications activities.
\5\ The Report recommended rule amendments to broaden exemptions
for routine financings by subsidiaries of registered holding companies
(see Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 33640
(June 28, 1995)) and to provide a new exemption for the acquisition of
interests in companies that engage in energy-related and gas-related
activities (see Holding Co. Act Release No. 26667 (Feb. 14, 1997), 62
FR 7900 (Feb. 20, 1997) (adopting Rule 58)). In addition, the Report
recommended and the SEC has implemented changes in the administration
of the Act that would permit a ``shelf'' approach for approval of
financing transactions. For example, during calendar year 2000, all 11
of the new registered holding companies received multiyear financing
authorizations that included a wide range of debt and equity
securities. The Report also recommended a more liberal interpretation
of the Act's integration requirements which have been carried out in
our merger orders. The Report also recommended an increased focus upon
auditing regulated companies and assisting State and local regulators
in obtaining access to books, records and accounts. Six State public
utility commissions participated in the last three audits of the books
and records of registered holding companies.
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There has nonetheless been increased activity under the 1935 Act,
especially in the area of mergers and acquisitions, corporate
restructuring, diversification and affiliate transactions. The industry
has also experienced an accelerating pace of initiatives at the State
level to foster competition and the implementation of initiatives at
the FERC to address open transmission and related structural issues.
Finally, the internationalization of the industry has continued. In
addition to the foreign investments of U.S. utilities, during the past
2 years, three British utility companies have acquired American
utilities and subsequently registered under the Act.\6\ A Canadian
utility has also announced its plans to acquire a utility in the United
States.\7\ At the same time, problems have arisen in the electric
industry. The electricity shortages, price increases and rolling
blackouts experienced in California represent some of the most severe
problems. Specifically, in California, acute supply shortages, opposition
and legal impediments to new power plant construction and high natural
gas prices have driven wholesale electricity prices to extraordinary
levels. The two largest California utilities have not been allowed to
pass wholesale price increases through to consumers and, as a result,
are experiencing severe liquidity problems. They have stated publicly
that they may file for bankruptcy. Some industry experts, as well as a
number of press reports, have speculated that other areas of the country
may experience similar problems this summer. With these issues further
complicating already complex questions, energy reform legislation is
again being considered in this Congress. Repeal of PUHCA is once again
part of this discussion.
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\6\ The three British companies that have made acquisitions in the
United States and are currently registered under the Act are National
Grid Group plc, Scottish Power plc and PowerGen plc. See Holding Co.
Act Release No. 27154 (Mar. 15, 2000) (authorizing National Grid's
acquisition of New England Electric System); Holding Co. Act Release
No. 27166 (Apr. 14, 2000) (authorizing National Grid's acquisition of
Eastern Utility Associates); Holding Co. Act Release No. 27290 (Dec. 6,
2000), corrected by Holding Co. Act Release No. 27292 (Dec. 7, 2000)
(authorizing Scottish Power to engage in certain financing transactions
following its acquisition of PacifiCorp and registration under the
Act); Holding Co. Act Release No. 27291 (Dec. 6, 2000) (authorizing
PowerGen's acquisition of LG&E Energy Group); Holding Co. Act Release
No. 27312 (Dec. 21, 2000) (authorizing proxy solicitation in connection
with National Grid's proposed acquisition of Niagara Mohawk).
\7\ Emera Inc., the owner of Nova Scotia Power, has announced a
deal to acquire Bangor Hydro-Electric Company and has applied for an
order approving the transaction. See SEC File No. 70-9087 (application
filed Nov. 6, 2000).
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Current Proposals to Repeal the 1935 Act
Repeal of the 1935 Act may be accomplished either separately or as
part of a more comprehensive package of energy reform legislation. S.
206 would repeal the Act on a stand-alone basis.
Based on the findings in the Report as well as the continuing pace
of change in the utility industry, the SEC has recommended, and
continues to recommend, that Congress repeal the 1935 Act. The SEC does
not have a preference as to whether the Act is repealed on a stand-
alone basis or as part of broader, energy-related legislation. However,
the SEC does recommend the enactment of legislation to provide
necessary authority to the Federal Energy Regulatory Commission
(``FERC'') and the State public utility commissions relating to
affiliate transactions, audits and access to books and records, for the
continued protection of utility consumers. As the Report stated,
regulation under the 1935 Act that affects the ability of holding
company systems to issue securities, acquire other utilities, and
acquire nonutility businesses is largely redundant in view of other
existing regulation and controls imposed by the market. There is,
however, a continuing need to protect consumers.
Although deregulation is changing the way utilities operate in some
States, electric and gas utilities have historically functioned as
monopolies whose rates are regulated by State authorities. Some
regulators subject these rates to greater scrutiny than others. There
is a continuing risk that a monopoly, if left unguarded, could charge
higher rates and use the additional funds to subsidize affiliated
businesses in order to boost its competitive position in other markets.
Thus, so long as electric and gas utilities continue to function as
monopolies, the need to protect against this type of cross-
subsidization will remain. In view of the sophistication of
contemporary securities regulation, and analysis by the public and
private sectors, the best means of guarding against cross-subsidization
is likely to be audits of books and records and Federal oversight of
affiliate transactions.
S. 206 represents a form of this type of conditional repeal--the
type of conditional repeal that the SEC has endorsed. In particular, S.
206 would provide the FERC with the right to examine books and records
of holding companies and their affiliates that are relevant to costs
incurred by associate utility companies, in order to protect
ratepayers. S. 206 would also provide an interested State commission
with access to such books and records (subject to protection for
confidential information), if they are relevant to costs incurred by
utility companies subject to the State commission's jurisdiction and
are needed for effective discharge of the State commission's
responsibilities in connection with a pending proceeding. Finally, S.
206 would provide a transition period in which States, utilities and
other parties affected by the change in the regulatory structure could
prepare for the new framework. S. 206 thus accomplishes many of the
goals of the conditional repeal advocated by the SEC.
Repealing the Act is not, however, a magic solution to the current
problems facing the U.S. utility industry. While PUHCA repeal can be
viewed as part of the needed response to the current energy problems
facing the country, repeal of the Act will not directly affect the
supply of electricity in the United States. Indeed, in 1992, as part of
the Energy Policy Act, Congress amended the Act to remove most
restrictions on the ability of registered and exempt holding companies
as well as nonutility companies to build, acquire and own generating
facilities anywhere in the United States. As a result, a number of
registered holding companies now have large subsidiaries that own
generating facilities nationwide. Repeal of the Act would instead
remove provisions that prohibit utility holding companies from owning
utilities in different parts of the country and that prevent nonutility
businesses from acquiring regulated utilities.
Repeal of the Act would thus likely have the greatest impact on
both the continuing consolidation of the utility business as well as
the entry of new companies into the utility business. As outlined
above, the SEC's primary concern with repeal is how consumers will be
protected in this new environment. The SEC urges that S. 206 be amended
to include provisions giving the FERC the authority it needs to oversee
transactions among affiliates in holding company systems. Provisions
granting access to books and records provide the FERC and the State
commissions with the authority they need to identify affiliate
transactions, review their terms and evaluate their effects on utility
costs and rates. Nonetheless, the potential for cross-subsidization and
consequent detriment to consumers remains, and the SEC believes it is
important that the FERC have the flexibility to engage in more
extensive regulation if necessary.
The current situation in California illustrates this need.
California's problems have been caused by, among other things, the need
to construct additional generating capacity and perhaps additional
transmission facilities. It is unclear whether repeal of the 1935 Act
would have any real effect, positive or negative, on these problems.
However, another component of California's problems is the precarious
financial condition of the State's utilities. While the cost of
acquiring power has had a significant impact on the financial condition
of California's utilities, there have been suggestions in the press and
elsewhere that these utilities' financial problems were exacerbated by
their holding companies' decisions to use the profits of their
regulated utility subsidiaries to finance investments in unregulated
businesses. Regardless of whether these suggestions are true--the
holding companies that own California's utilities are currently exempt
from most provisions of the 1935 Act and are thus largely unregulated
by the SEC--the potential for abuses of this type demonstrates the need
to give State and/or Federal regulators unfettered access to the books
and records of holding companies so that they can develop a full
understanding of the types of transactions occurring within the holding
company. Moreover, because similar types of abuses can occur through
affiliate transactions that cross-subsidize unregulated businesses with
the profits of regulated utilities, regulators need the authority to
review and analyze all transactions within a holding company system and
prohibit those that pose unreasonable risks for utility ratepayers. The
SEC therefore continues to support a broader grant of authority to the
FERC to oversee these types of transactions including, if the FERC
deems it appropriate, the authority to pre-review and pre-approve
affiliate transactions.
Questions have also arisen about how the Act, if not repealed, will
impact the FERC's ability to implement its plans to restructure the
control of transmission facilities in the United States.\8\ As a result
of FERC's plans, many utilities will cede operating control--and in
some cases, actual ownership--of their transmission facilities to newly
created entities. The status of these entities as well as the status of
utility systems that own stakes in them raise a number of issues under
the Act.
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\8\ See FERC Order 2000, ``Regional Transmission Organizations,''
65 FR 810 (Jan. 6, 2000) (codified at 18 C.F.R. Sec. 35.34).
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While the SEC believes it has the necessary authority under the Act
to deal with the issues created by the FERC's restructuring without
impeding that restructuring, repeal of the Act would resolve the
issues. In the absence of repeal, however, there are potential
amendments to the Act that would permit the SEC more efficiently to
deal with regulatory conflicts and other issues of this type. In both
the Report and in prior testimony, the SEC has suggested that if
Congress chooses not to repeal the Act, it could grant the agency broad
exemptive authority similar to that we currently have under the other
Acts that we administer.\9\ Although an expansion of the SEC's
exemptive authority under the Act would not achieve the economic
benefits of simplifying the Federal regulatory structure and would
continue to enmesh the SEC in difficult issues of energy policy, it
would provide the SEC with a greater ability to respond quickly and
appropriately to changes in the industry and the regulatory
environment.
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\9\ The SEC's current exemptive authority under the 1935 Act is
considerably narrower than the exemptive authority under other
securities laws. A model of broader exemptive authority is contained in
section 6(c) of the Investment Company Act of 1940, 15 U.S.C. Sec. 80a-
6(c), which grants the SEC the authority by rule or order to exempt any
person or transaction from any provision or rule if the exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors. See also section 206A of the Investment
Adviser's Act of 1940, 15 U.S.C. Sec. 80b-6a and section 36 of the
Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78mm. Section 28 of
the Securities Act of 1933, 15 U.S.C. Sec. 77z-3, grants the Commission
similar exemptive authority, but permits it to exercise it only
pursuant to a rulemaking.
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The SEC takes seriously its duties to administer faithfully the
letter and spirit of the 1935 Act, and is committed to promoting the
fairness, liquidity, and efficiency of the U.S. securities markets. By
supporting conditional repeal of the 1935 Act, the SEC hopes to reduce
unnecessary regulatory burdens on America's energy industry while
providing adequate protections for energy consumers.
----------
PREPARED STATEMENT OF CYNTHIA A. MARLETTE
Deputy General Counsel
Federal Energy Regulatory Commission
March 29, 2001
Senator Enzi and Members of the Subcommittee: Good morning. My name
is Cynthia A. Marlette, and I am Deputy General Counsel of the Federal
Energy Regulatory Commission (FERC). Thank you for the opportunity to
appear here today to discuss the Public Utility Holding Company Act of
1935 (PUHCA) and S. 206, which would repeal the 1935 Act and replace it
with a streamlined Act. I appear today as a Commission staff witness,
and do not speak on behalf of the Commission or any Commissioner.
As I will discuss further in my testimony, S. 206 provides an
important piece of the legislative reform that is needed to support the
Nation's emerging competitive electric energy markets. At this critical
stage in the evolution of the electric industry, it is important to
take all reasonable measures to support the development of competitive
energy markets and to provide appropriate incentives for electric and
natural gas infrastructure to meet our Nation's energy needs. Such
measures must ensure adequate protection of electric and natural gas
ratepayers from abuse of market power and inappropriate cross-
subsidization. Repeal or reform of PUHCA, such as that contained in S.
206, will help accomplish these objectives, whether as part of a
comprehensive energy legislative package or on a stand-alone basis.
This is a time of enormous change for the electric utility
industry. We are at a critical juncture in the development of
competitive power markets, and it is appropriate for the Congress to
reexamine the framework for regulating electric utilities, including
unnecessary restrictions that PUHCA places on the activities of certain
participants in these power markets. While one of the goals of PUHCA
was to protect against corporate structures that could harm investors
and ratepayers, today some of PUHCA's restrictions may actually impede
competitive markets and appropriate competitive market structures, to
the detriment of ratepayers and shareholders in the long run.
Since the Banking Committee's hearings on an earlier version of
PUHCA repeal legislation were held in 1996, the FERC and many State
regulators and State legislatures have continued regulatory actions to
support and encourage the development of competitive power markets at
both the wholesale and retail levels. Many areas of the country, such
as Pennsylvania, have been very successful. However, there have been
some bumps in the road. In particular, California's experience with
only a partially deregulated electric generation market and a severe
lack of adequate generation supply and transmission infrastructure in
that State have grabbed media attention nationwide. This has caused
some regulators and industry observers to become wary of the promised
virtues of competition in the electric industry. There is no doubt that
California and the West face serious, complex electric power supply and
pricing issues. Nevertheless, while regulators and industry
participants may disagree on near-term remedies to address the
dysfunctions in California and Western power markets, the majority of
industry observers continue to believe that competitive power markets,
as opposed to traditional cost-based regulation, will best serve
consumers in the long run.
In past testimony, FERC witnesses have raised no objection to
repeal or reform of PUHCA, so long as certain ratepayer issues are
addressed. Today, we continue to take the position that PUHCA needs to
be repealed or reformed, so long as the following matters are
addressed:
First, Congress should ensure that the FERC and State
regulatory authorities have adequate access to the books and
records of all members of all public utility holding company
systems when that information is relevant to their statutory
ratemaking responsibilities. This is necessary to prevent affiliate
abuse and subsidization by electricity ratepayers of nonregulated
activities of holding companies and their affiliates.
Second, any exemptions from a new holding company act should
be crafted narrowly. While it may be appropriate to grandfather
previously authorized activities or transactions, no holding
company should be exempt from affiliate abuse oversight.
Third, if Congress transfers any existing PUHCA functions to
the FERC, instead of repealing PUHCA in its entirety, Congress
needs to provide FERC with staff and administrative support
necessary for us to carry out the additional responsibilities.
S. 206, as it was introduced on January 30, 2001, adequately
addresses the above concerns.
Background
Under current law, the two major Federal statutes affecting
electric utilities are PUHCA and the Federal Power Act (FPA). Both
statutes were enacted as part of the same legislation in 1935 to curb
widespread financial abuses that harmed electric utility investors and
electricity consumers. While there is overlap in the matters addressed
by these Acts, they each have different public interest objectives. The
areas of overlap in the two statutes, and specific issues raised if
PUHCA is repealed or amended, are described in detail in the Attachment
to my testimony. As a general matter, however, the Securities and
Exchange Commission (SEC) regulates registered public utility holding
companies under PUHCA while FERC, under the FPA, regulates the
operating electric utility and gas pipeline subsidiaries of the
registered holding companies. The agencies often have responsibility to
evaluate the same general matters, but from the perspective of
different members of the holding company system and for different
purposes. The FERC focuses primarily on a transaction's effect on
utility ratepayers. The SEC focuses primarily on a transaction's effect
on corporate structure and investors.
In June 1995, the SEC issued a report entitled ``The Regulation of
Public-Utility Holding Companies'' and recommended that Congress
conditionally repeal PUHCA and enact certain ratepayer safeguards in
its place. We agree with a fundamental premise of the SEC's report that
rate regulation at the Federal and State levels has become the primary
means of ensuring ratepayer protection against potential abuse of
monopoly power by utilities that are part of holding company systems.
Further, we believe that PUHCA, in its current form, may actually
encourage market structures that impede competition. In particular,
under PUHCA acquisitions by registered holding companies generally must
tend toward the development of an ``integrated public-utility system.''
To meet this requirement, the holding company's system must be
``physically interconnected or capable of physical interconnection''
and ``confined in its operations to a single area or region.'' This
requirement tends to result in geographic concentrations of generation
ownership, which may enhance market power and diminish competition.
In addition, PUHCA may cause unnecessary regulatory burdens to
utilities who, in compliance with Commission policy and regulations,
seek to form or join regional transmission organizations (RTO's). It is
RTO's that will provide the major structural reform needed in the
electric industry to ensure mitigation of market power and an
efficient, reliable transmission system. These institutions will
operate, or both own and operate, the interstate transmission grid
within their regions, provide transmission services on an open,
nondiscriminatory basis, and provide the means for regional
transmission planning. They may be nonprofit independent system
operators (ISO's), or they may be for-profit transmission companies
(transcos), or a combination of the two. The cornerstone requirement
for the institutions, however, is that they be independent from power
market participants, i.e., independent from those that own, sell or broker
generation. Under PUHCA, any entity that owns or controls facilities used
for the transmission of electric energy--such as an RTO--falls within the
definition of public utility company, and any owner of 10 percent or more
of such a company would be a holding company and potentially
could be required to become a registered holding company. This could
serve as a significant disincentive for investments in independent
for-profit transcos that qualify as RTO's.
Review of S. 206
S. 206 would repeal PUHCA and, in its place, enact the Public
Utility Holding Company Act of 2001. The new Act would do five major
things:
provide the FERC with access to books and records of holding
companies and their associate and subsidiary companies, and of any
affiliates of holding companies or their subsidiaries (section 5);
give State commissions that have jurisdiction over a public
utility in a public utility holding company system access to books
and records of a holding company, its associates or affiliates
(section 6);
require the FERC to promulgate a final rule, no later than 90
days after enactment, to exempt from the books and records access
requirements of section 5 any person that is a holding company
solely with respect to one or more: qualifying facilities under the
Public Utility Regulatory Policies Act of 1978; exempt wholesale
generators; or foreign utility companies (section 7);
provide that nothing in the Act precludes the FERC or a State
commission from exercising its jurisdiction under otherwise
applicable law to determine whether a public utility may recover in
rates any costs of an activity performed by an associate company,
or any costs of goods or services acquired from an associate
company (section 8); and
grandfather activities in which a person is legally engaged or
authorized to engage on the effective date of the new act (section
9).
With these protections in place, and with the Commission's other
regulatory authorities under the FPA in place, we believe that S. 206
is an appropriate vehicle for repealing PUHCA without impairing
ratepayer protection.
If PUHCA is not repealed, Congress should address the Ohio Power
regulatory gap created by a 1992 court decision. In a decision by the
United States Court of Appeals for the District of Columbia Circuit,
Ohio Power Company v. United States, 954 F.2d 779 (D.C. Cir. 1992), the
court held that if a public utility subsidiary of a registered holding
company enters into a service, sales or construction contract with an
affiliate company, the costs incurred under that affiliate contract
cannot be reviewed by FERC. The court reasoned that because the SEC has
to approve the contract before it is entered into, FERC cannot examine
the reasonableness or prudence of the costs incurred under that
contract. FERC must allow the costs to be recovered in wholesale
electric rates, even if the utility could have obtained comparable
goods or services at a lower price from a nonaffiliate.
The Ohio Power decision has left a gap in rate regulation of
electric utilities. The result is that utility customers served by
registered holding companies have less rate protection than customers
served by nonregistered systems. If PUHCA is repealed, as in S. 206,
this issue becomes moot. If the contract approval provisions of PUHCA
are retained, however, this regulatory gap should be closed to restore
FERC's ability to regulate the rates of utilities that are members of
registered holding company systems.
In summary, S. 206 provides an appropriate means to help promote
emerging competitive electric power markets while at the same time
providing the FERC and States additional access to books and records in
order to protect consumers against inappropriate cross-subsidization
and market power abuse. Thank you again for the opportunity to be here
today, and I would be happy to answer any questions you may have.
ATTACHMENT TO STATEMENT OF CYNTHIA A. MARLETTE
Existing Statutory Framework: FERC/SEC Jurisdiction
The FERC's primary function under the FPA is ratepayer protection.
The FERC regulates public utilities as defined in the FPA. These
include individuals and corporations that own or operate facilities
used for wholesale sales of electric energy in interstate commerce, or
for transmission of electric energy in interstate commerce. The FERC
does not regulate all utilities. Publicly owned utilities and most
cooperatives are exempt from our traditional rate regulatory authority.
The FERC ensures that rates, terms and conditions for wholesale
sales of electric energy and transmission are just, reasonable and not
unduly discriminatory or preferential. In addition, the FERC has
responsibilities over corporate mergers and other acquisitions and
dispositions of jurisdictional facilities, transmission access, certain
issuances of securities, interlocking directorates, and accounting. In
exercising its responsibilities, the Commission must take into account
any anticompetitive effects of jurisdictional activities.
There is overlap in the jurisdiction of the FERC and the SEC. As a
general matter, the SEC regulates registered utility holding companies
whereas the FERC regulates the operating electric utility and gas
pipeline subsidiaries of the registered holding companies. The agencies
often have responsibility to evaluate the same general matter, but from
the perspective of different members of the holding company system and
for different purposes. The FERC primarily focuses on the impact of a
transaction on utility ratepayers. The SEC, on the other hand,
primarily focuses on the impact of a transaction on corporate structure
and investors.
There are four major areas of overlap in the jurisdiction of the
FERC and the SEC with respect to regulation of the electric industry:
(1) Accounting--The SEC has authority to establish accounting
requirements for every registered holding company, and every
affiliate and subsidiary of a registered holding company. Many
of these companies are public utilities that are also under the
FERC's jurisdiction and subject to its accounting requirements.
(2) Corporate regulation--The SEC must approve the
acquisition of a public utility's securities by a registered
holding company. The FERC must approve the disposition or
acquisition of jurisdictional facilities by a public utility.
(3) Rates--The SEC must approve service, sales and
construction contracts among members of a registered holding
company system. The FERC must approve wholesale rates
reflecting the reasonable costs incurred by a public utility
under such contracts.
(4) PUHCA Exemptions--Under the PUHCA section 32 amendment
contained in the Energy Policy Act of 1992, the FERC must
determine whether an applicant meets the definition of exempt
wholesale generator, and thus is exempt from the Holding
Company Act. With minor exceptions, the SEC continues to make
PUHCA exemption determinations under the pre-Energy Policy Act
PUHCA provisions as well as under the new section 33 of PUHCA
(concerning foreign companies).
Congress recognized the overlap in FERC-SEC jurisdiction when it
simultaneously enacted PUHCA and the FPA in 1935. It included section
318 in the FPA, which provides that if any person is subject to both a
requirement of the FPA and PUHCA with respect to certain subject
matters, only the requirement of PUHCA will apply to such person,
unless the SEC has exempted such person from the requirements of PUHCA.
If the SEC has exempted the person from the PUHCA requirement, then the
FPA will apply.
During the half-century following enactment of PUHCA and the FPA,
there were no significant problems resulting from the overlap in FERC-
SEC jurisdiction, until a series of court decisions involving the
wholesale rates of the Ohio Power Company. Under the last of these
court decisions, a 1992 decision by the United States Court of Appeals
for the District of Columbia Circuit (Ohio Power Company v. FERC, 954
F.2d 779 (D.C. Cir. 1992) (Ohio Power)), the FERC does not have the
extent of rate jurisdiction which it previously thought it had over
public utility subsidiaries of registered electric utility holding
companies.
Under the 1992 Ohio Power decision, if a public utility subsidiary
of a registered holding company enters into a service, sales or
construction contract with an affiliate company, the costs incurred
under that affiliate contract cannot be reviewed by the FERC. The SEC
has to approve the contract before it is entered into. However, the
FERC cannot examine the reasonableness or prudence of the costs
incurred under that contract. The FERC must allow those costs to be
recovered in wholesale electric rates, even if the utility could have
obtained comparable goods or services at a lower price from a
nonaffiliate.
This decision has left a major gap in rate regulation of electric
utilities. The result is that utility customers served by registered
holding companies have less rate protection than customers served by
nonregistered systems. If PUHCA is repealed, the Ohio Power problem
goes away. This is a significant advantage of S. 206, introduced
January 30, 2001. S. 206 would repeal PUHCA and enact a new, more
limited law that does not give rise to an Ohio Power problem. Short of
repeal of PUHCA, however, the existing regulatory gap needs to be
addressed.
Issues Raised If PUHCA Is Repealed or Amended
There are several ratepayer protection issues on which Congress
should focus in considering PUHCA legislation. S. 206 adequately
addresses these issues.
An important aspect of ratepayer protection is preventing affiliate
abuse and the subsidization by ratepayers of the nonregulated
activities of nonutility affiliates. These issues can arise in
virtually every area of the FERC's responsibilities. In the case of
public utilities that are members of holding companies, there are
increased opportunities for abuses. There are several reasons for this.
First, registered holding companies have centralized service
companies that provide a variety of services (e.g., accounting, legal,
administrative and manage-
ment services) to both the regulated public utility operating companies
in the holding company system, and to the nonregulated companies in the
holding company system. The FERC's concern in protecting ratepayers is
that when the costs of these service companies are allocated among all
members of the holding company system, the ratepayers of the public
utility members bear their fair share of the costs and no more;
ratepayers should not subsidize the nonregulated affiliates of the
public utilities.
Thus far, FERC has had few, if any, problems with inappropriate
allocations of service company costs. The services provided by the
centralized service companies have been relatively limited. In recent
years, however, there has been a substantial increase in the services
being performed by these types of service company affiliates. In many
registered company systems, the majority of the costs of operating and
maintaining the operating utilities' systems, which previously were
incurred directly by each individual utility, are now being incurred by
the service company and billed to the public utility under SEC-approved
allocation methods. These costs can be significant for ratepayers. This
means that rate regulatory oversight of service company allocations is
imperative.
A second concern involves special purposes subsidiaries. In
addition to the centralized service companies, registered holding
companies increasingly are forming special purpose subsidiaries that
contract with their public utility affiliates to supply services, as
well as goods and construction. This can include fuel procurement,
services such as operation of power plants, telecommunications, and
construction of transmission lines and generating plants.
The FERC's primary concern with affiliate contracts for goods and
services is that utilities not be allowed to flow through to electric
ratepayers the costs incurred under affiliate contracts if those costs
are more than the utility would have incurred had it obtained goods or
services from a nonaffiliate. As discussed earlier, under the 1935
PUHCA the FERC cannot provide adequate protection to ratepayers served
by registered systems because of the 1992 Ohio Power court decision.
The Commission recently has made some progress in protecting
customers served by registered holding companies by using its
conditioning authority over registered holding company public utilities
that seek approval to sell power at market-based rates. The Commission
has said that if such utilities want to sell at market-based rates,
they must agree not to purchase nonpower goods and services from an
affiliate at an above-market price; they must agree that if they sell
nonpower goods and services to an affiliate, they will do so at the
higher of their cost or a market price. However, the Commission's
market rate conditioning authority is not enough to protect all
registered system ratepayers against abusive affiliate contracts. Short
of repeal of PUHCA, legislation is needed to fully remedy the
regulatory gap.
According to the SEC's 1995 report, service companies render over
100 different types of services to the operating utilities on their
systems, with nonfuel transactions aggregating approximately $4 billion
annually. This growth adds to the potential for ratepayer subsidies
involving both the centralized and the special-purpose service
companies.
Another reason for heightened concern regarding affiliate abuses in
all holding company systems, both registered and exempt, is the large
number of holding company subsidiaries that engage in nonutility
businesses. According to the SEC report, since the early 1980's the
number of nonutility subsidiaries of registered companies has
quadrupled to over 200. The trend in exempt companies is also likely to
be significant as well. The sheer number of nonutility business
activities brings greater potential for improper allocation of
centralized service company costs to the nonutility businesses (i.e.,
electric ratepayers subsidizing the nonutilities' fair share of the
costs). It also increases the opportunities for affiliate contracting
abuses.
To protect against affiliate abuse and cross-subsidization, Federal
and State regulators must have access to the books, records and
accounts of public utilities and their affiliates. Under section 301 of
the FPA (and section 8 of the Natural Gas Act), the FERC has
substantial authority to obtain such access. It can obtain the books
and records of any person who controls a public utility, and of any
other company controlled by such person, insofar as they relate to
transactions with or the business of the public utility. This, however,
may not necessarily reach every member of the holding company. Thus
far, there has been no significant problem in obtaining access to books
and records and in monitoring and protecting against potential abuses.
However, the SEC's regulatory role with respect to registered systems
has been an added safeguard.
It is critical that both State and Federal regulators have access
to books and records of all companies in a holding company system that
are relevant to costs incurred by an affiliated utility. This is
equally true with respect to both registered and exempted holding
company systems. If Congress modifies or repeals PUHCA, it should
clearly confirm the FERC's mandate and authority to ensure that
ratepayers are protected from affiliate abuse. Similarly, we encourage
Congress to be mindful of concerns expressed by State commissions and
provide States with appropriate access to relevant books and records of
all holding company systems.
In addition to the above ratepayer protection concerns, there are
several other matters that should be considered in analyzing PUHCA
reform. These include future corporate structures in the electric
industry, diversification activities, and the issuances of securities
affecting public utilities.
As mentioned earlier, the FERC must approve public utility mergers,
acquisitions, and dispositions of jurisdictional facilities. This is an
area in which the Commission has overlapping jurisdiction with the SEC,
but also an area in which in some instances there is no overlap.
Jurisdictional facilities under the FPA are facilities used for
transmission in interstate commerce, or for sales for resale in
interstate commerce. FERC has claimed jurisdiction over transfers of
jurisdictional sales contracts but has disclaimed jurisdiction over
dispositions that solely involve physical generation facilities. It
appears that State regulators have adequate authority to regulate
dispositions of physical generation assets. Further, such dispositions
or acquisitions would be subject to the antitrust laws.
The FERC does not have jurisdiction to approve or disapprove
diversification activities of public utilities or holding companies.
Thus, if PUHCA were repealed, there would be no Federal oversight of
diversification activities of registered holding companies or their
public utility members, other than through FERC auditing of books and
records. The SEC does not directly review public utility
diversification activities of other holding companies and public
utilities, and this has not posed any significant problems in the
FERC's protection of ratepayers. In addition, many State commissions
regulate diversification by public utilities that sell at retail.
A final area involves issuances of securities. The FERC must
approve issuances of securities by public utilities that are not
members of registered holding company systems, unless their security
issuances are regulated by a State commission. Because the majority of
States regulate issuances by public utilities, the FERC does not
regulate most public utilities' issuances. If PUHCA were repealed, it
appears that there would be no Federal review and approval of issuances
of securities by holding companies or their public utility members. The
SEC can more appropriately address whether any Federal oversight is
necessary in this area.
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PREPARED STATEMENT OF DAVID M. SPARBY
Vice President, Government and Regulatory Affairs
Xcel Energy, Inc.
March 29, 2001
Introduction
Senator Enzi, Members of the Subcommittee, my name is Dave Sparby,
and I am the Vice President, of Government and Regulatory Affairs of
Xcel Energy, Inc. Xcel Energy is a holding company registered under the
Public Utility Holding Company Act of 1935 (``PUHCA''). Xcel Energy was
created as the result of a merger between Minneapolis-based Northern
States Power (NSP) and Denver-based New Century Energies (NCE). The
merger of those two companies was completed on August 17 of last year,
some 17 months after it was announced. Xcel Energy serves more than 3
million electricity and 1.5 million natural gas customers in 12 States,
and 2 million electricity customers internationally.
While I am speaking here today on behalf of Xcel Energy, I would
note that we are also members of the Repeal PUHCA Now! Coalition, an ad
hoc group of electric and gas utility systems, with public utility
operations (collectively, the ``Coalition'').\1\ We at Xcel, and the
other members of the Coalition, would like to thank you very much for
inviting us to submit testimony in favor of legislation repealing
PUHCA.
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\1\ A complete list of the companies forming the Coalition is set
forth in Attachment 1.
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As Senator Enzi and other Members of the Subcommittee know, issues
surrounding the relevance and efficacy of PUHCA, originally enacted in
1935, have been before the Congress almost continuously over the past
20 years. And while the statue has been amended in piecemeal fashion to
respond to the changing dynamics of the energy industry, true reform
has remained elusive. The legislation now before the Subcommittee, S.
206, offers the promise of such true reform and we support its speedy
enactment. Indeed, legislation like S. 206 has been reported by the
full Banking Committee, in identical or virtually identical form in
each of the last two Congresses.
The Case for PUHCA Repeal
To be clear, we believe the case for enactment of S. 206 is strong.
As articulated more eloquently in previous reports of the Subcommittee
and elsewhere:
The purposes underlying the original requirements and
regulations under PUHCA no longer exist and other regulatory
programs at the State and Federal level have arisen to address
remaining concerns;
PUHCA's restrictions and requirements deter and inhibit the
otherwise orderly flow of capital into emerging competitive
markets; and
PUHCA requirements might well work at cross purposes with
other important national energy initiatives.
The Need for PUHCA Regulation Has Passed
To provide some historical perspective, it must be remembered that
when PUHCA was enacted nearly 67 years ago, it was designed primarily
to eliminate the unsound financial structures that had been created by
gas and electric holding companies during the 1920's. Abuses discovered
at the time included the marketing of holding company securities based
on unsound and fictitious values and without adequate disclosure to
investors, and a practice by some companies of requiring their
operating utility subsidiaries to pay excessive dividends or purchase
services at excessive prices under non-arms-length service contracts.
Congress entrusted the administration of this statute to the new
Securities and Exchange Commission (``SEC'') because the SEC was the
agency with the greatest expertise in financial matters and was already
charged with the responsibility for overseeing investor protection
under the Securities Act of 1933 and the Securities and Exchange Act of
1934. PUHCA is unique, however, in that it is the only securities
statute designed to regulate a single non-financial industry.
The task of overseeing the financial restructuring of the electric
and gas utility holding companies was largely completed by the mid-
1950's. And, as the SEC's role in administering other Federal
securities laws has evolved, it has become clear that PUHCA no longer
serves any independent purpose in assuring investor protection. PUHCA
is intended, after all, to regulate ``the corporate structure and
financing of public-utility holding companies and other affiliates.''
There is no question but that this authority is redundant of that which
the SEC already has under the Securities Act of 1933 and Securities and
Exchange Act of 1934. And in part for that reason, since 1982, the SEC
has been on record favoring repeal of PUHCA.
Some have argued, however, that repeal of PUHCA would create a new
``gap'' in effective State/Federal regulation of utilities to the
detriment of utility customers. But in this regard, it is important to
remember what PUHCA does, and what it does not do. PUHCA does not, and
was never intended to, address rate regulatory issues. Local
distribution matters are exclusively within the province of State
regulators, while the setting of wholesale rates and other transactions
by utilities relating to the transmission of electricity or of natural
gas in interstate commerce are regulated by the FERC. Repeal of PUHCA
as proposed in the bill before you would not alter this allocation of
jurisdiction and authority and indeed, the record keeping and report
requirements of the legislation will facilitate the on-going work of
FERC and State agencies to protect ratepayer interests.
Moreover, the ``gap'' in effective State regulation of electric and
gas utilities that Congress found in 1935 no longer exists. Simply put,
electric and gas utilities are among the most highly regulated
businesses there are, and there is no longer any basis for believing
that the States and the Federal Energy Regulatory Commission (``FERC'')
are unable to protect utility consumers.
The Effect of PUHCA on Necessary Investment
If PUHCA were merely an arcane law directed at problems that no
longer exist, or simply duplicated other Federal and State regulatory
laws, perhaps the case for PUHCA repeal would not be quite so
compelling. But because of the structural inflexibility that is built
into PUHCA, the statute has long been an obstacle to the implementation
of significant competitive, economic and regulatory changes occurring
in this country and throughout the world. PUHCA prevents registered
holding companies from participating equally with all other energy
companies in various activities that Congress and other Federal
agencies are promoting, and, in addition, deters new investment in
certain energy businesses by non-traditional investors by subjecting
them to possible SEC regulation as statutory ``holding companies.''
In the past, Congress has addressed the ``PUHCA Problem'' in a
piecemeal fashion. For example, Congress passed legislation in 1978 and
again in the mid-1980's designed to promote the development of and
investment in cogeneration and small power production facilities in the
United States. Further amendments in 1990 were designed to allow the
registered gas utility holding companies to participate fully in
natural gas supply ventures. In 1992, the Energy Policy Act had
somewhat lowered the PUHCA barrier to the development of an
independent, competitive, wholesale generation market, and in 1996,
Congress authorized registered holding companies, like all other
companies, to invest in new telecommunications businesses.
Nonetheless, the ``integration'' standards under PUHCA remain an
obstacle to economically desirable utility mergers. The FERC's review
of electric utility mergers focuses on assuring that they are pro-
competitive, that is, that a merger does not lead to a situation in
which the resulting company has too much control over generation assets
in a single geographic market. Under the FERC's merger guidelines,
therefore, it is much easier to form a union between utilities that
operate in different markets than between utilities that operate next
door to each other. And yet the PUHCA integration standard stands in
the way of geographically diverse utility systems by limiting a
registered holding company to a single ``integrated'' electric system
that's confined to a single area or region.
PUHCA also prevents registered holding companies from engaging in
many desirable nonutility businesses, or, at a minimum, requires
lengthy filings with the SEC and onerous ongoing reporting obligations
that unregulated competitors in these businesses are not subjected to.
This intrusion into the business judgment of holding company management
is unprecedented under Federal law and positively harms the interest of
investors by imposing costs in the form of lost business opportunities
and regulatory compliance costs.
Under PUHCA, a company organized to construct and own new
generation [except ``exempt wholesale generators'' (called an ``EWG'')]
or transmission facilities would be an ``electric utility company,''
and any 10 percent owner of its stock would be a ``holding company.''
Every holding company must register under PUHCA, absent an available
exemption. Registration would subject an investor to onerous financial
and business regulation by the SEC. In addition, in many cases, an
investor who acquires 5 percent or more of the stock of an electric
utility company would require SEC approval, which necessitates a
lengthy review process. Therefore, out-of-State utilities, as well as
other types of nontraditional investors (e.g., equipment suppliers,
diversified energy companies, and financial investors) are effectively
deterred from making innovative investments in new generation or
transmission assets. The EWG exemption does not apply to an entity
(called a ``Transco'') that is originated to build a new transmission
line to transport new generation capacity.
Existing utilities and holding companies would find it difficult to
obtain SEC approval under PUHCA to acquire 5 percent or more of the
stock of a new generation or transmission company. This is because the
``integration'' standards under PUHCA prohibit investments in utilities
in more than one State unless the facilities in each State are
physically interconnected with each other.
A nontraditional investor (e.g., an equipment manufacturer, a
diversified energy concern, or a financial investor) may not qualify
for any exemption under PUHCA if it became a ``holding company'' over a
new generation or transmission company. Thus, PUHCA hinders
nonutilities from making investments in new generation or transmission
assets.
The only practical option for investing in new generation in
California, for example, is through an ``exempt wholesale generator,''
or an ``EWG'' for short. An EWG is exempt from all provisions of PUHCA
and the owners of an EWG are not treated as ``holding companies.'' But
holding companies that are already registered under PUHCA, which now
account for more than 40 percent of the entire electric utility
industry, are limited by SEC regulations in the amount of investments
that they may make in EWG's. This investment restriction has impacted
the wholesale market in two ways:
First, many registered holding companies have already reached
their investment limit on other EWG projects and thus cannot enter
new markets. Thus, even if these utilities wanted to enter the
troubled California generation market, the PUHCA investment limit
would prohibit them from doing so or, at a minimum, necessitate a
lengthy and uncertain application review process at the SEC in
order to obtain increased investment authority.
Indeed, we believe that this restriction is one of the many factors
that might well have contributed to the current California energy
crisis and will stand in the way of any permanent solution is the
structural and financial restraints imposed under PUHCA. Because
PUHCA unnecessarily restricts the flow of capital it has a negative
impact on places such as California that are in tremendous need of
additional generation resources.
I might add that the same can be said for other areas of the West
as well. Xcel Energy is currently facing a tremendous problem in
Cheyenne, Wyoming. The citizens of that part of Wyoming are served
by Cheyenne Light, Fuel and Power Company (Cheyenne), a wholly
owned subsidiary of Xcel. Cheyenne, which owns no generation assets
of its own, has been serving local citizens through its purchase of
wholesale power from another utility as a full requirements
customer since 1963. This past year that provider indicated that it
would very significantly increase wholesale prices for future sales
to Cheyenne. To the extent that PUCHA's capital inhibiting affects
limited generation investment, this result as well as a number of
other factors, have led to significant increases in the short-term
costs to serve our customers.
Second, the EWG exemption applies only to entities that
generate electricity ``exclusively'' for sale at wholesale. Thus,
the EWG exemption provides no relief for new investment in
generation assets where the output will be sold at retail, even
though such retail sales are permitted--and even encouraged--by
State utility restructuring laws.
Passage of the bill before you will eliminate the artificial
structural and financial barriers that now inhibit the flow of capital
and would thus contribute to the resolution of California and broader
Western regional energy problems. To be clear, we are not here claiming
that PUHCA repeal, by itself, will solve the problems in Western
markets, just as it is by no means the sole cause of those problems,
but elimination of its outdated restrictions will certainly facilitate
the development of new generation and transmission capacity in the
West. All steps that can be taken to enhance investment in generation
and transmission capacity should be made during this energy shortfall.
Free flow capital is not merely a theoretical problem. Customers
throughout the Western Region have been hurt by the lack of development
of generation and transmission.
In short, with its mandate of a vertically integrated utility
system confined to a single area or region, PUHCA is clearly a barrier
to increasing competition in the electric and gas utility industries.
It inhibits efficiency gains, limits new competitors in the marketplace,
leads to differing regulatory rules for competitors that are holding
companies, and contributes to inefficient investment decisions by utility
management and shareholders. These costs are real, substantial and
should not be continued.
Potential PUHCA Conflicts With Other National Energy Objective
The requirements of PUHCA are also posing a serious near-term
obstacle to implementation of another national energy policy--the
formation of regional transmission organizations (RTO's) pursuant to
FERC Order No. 2000.
We see more and more that a preferred model for RTO structures is
the so-called Transco or Independent Transmission Company (ITC). The
ITC's are independent for-profit companies to which many utilities seek
to transfer both ownership and operating control of their transmission
assets. ITC treats transmission like a business, and has the most
incentive to move power--from whatever generating source. Their for-
profit status provides an efficient answer to reliably and
competitively manage the system and--most importantly today--provide
for its expansion. Yet, PUHCA would treat these new entities as
``electric utility companies.'' Ownership of securities in ITC's would
subject many now-exempt holding companies--and even utilities that are
not holding companies of any kind--to burdensome PUHCA restrictions.
Moreover, the registered electric utility holding companies (which
now account for more than 40 percent of the entire electric utility
industry) will need to seek routine approvals from the SEC in order to
transfer their transmission assets to RTO's and to provide other
financial support. Thus, we have one Federal agency (the FERC) that is
seeking to restructure the ownership and/or control of the Nation's
transmission grid, while another Federal agency (the SEC) stands in the
way.
Conclusion
PUHCA should be repealed at the earliest possible date. Therefore,
Xcel Energy and the Coalition would support appropriate ``stand alone''
legislation or the inclusion of satisfactory legislative language
repealing PUHCA in an acceptable ``comprehensive'' bill. And, we
believe that PUHCA repeal should be clean, without lingering vestiges
of this statue.
As the SEC has noted for almost 20 years now, PUHCA is an archaic
law that has long since served its original intended purposes. The
abuses that gave rise to the passage of PUHCA no longer exist and are
unlikely to recur, due to the existence of other regulatory laws. At
the same time, PUHCA has presented and will continue to present an
obstacle to the realization of other Federal and State energy
initiatives that favor competition and new investment. In short, as a
regulatory law, PUHCA almost always pushes in the wrong direction.
Thank you again, Mr. Chairman, for the opportunity to submit this
testimony to the Subcommittee.
PREPARED STATEMENT OF DAVID L. SOKOL
Chairman and CEO
MidAmerican Energy Holdings Company
March 29, 2001
Senator Enzi and Members of the Committee, I am David Sokol,
Chairman and CEO of MidAmerican Energy Holdings Company, a diversified,
international energy company headquartered in Des Moines, IA. I am here
today representing Mid-
American and other ``exempt'' utility holding companies that support S.
206.
Thank you very much for the opportunity to testify this morning on
an issue of great importance to my company, and I believe, the American
energy consumer. I would like to thank Senator Hagel for that very kind
introduction and I am pleased to say that I am also a constituent of
Senator Enzi's. I would like to commend Senator Enzi and the Members of
the Subcommittee for calling this timely and important hearing.
MidAmerican Energy Holdings Company consists of four major
subsidiaries: CE Generation (CalEnergy), a global energy company that
specializes in renewable energy development in California, New York,
Utah, Texas, Arizona and Nevada, as well as the Philippines;
MidAmerican Energy Company, an electric and gas utility serving the
States of Iowa, South Dakota, Illinois and a small part of Nebraska;
Northern Electric, a competitive electric and gas utility in the United
Kingdom, and Home Services.com, a residential real estate company
operating in, among other States, Maryland, Kentucky and Indiana.
CalEnergy owns and operates geothermal power plants in the Imperial
Valley of Southern California. The Company is the largest employer and
taxpayer in Imperial County, one of the most economically disadvantaged
counties in the State of California.
I would like to focus my remarks on providing the committee with
some real-world examples of how the Public Utility Holding Company Act
(PUHCA) is limiting investment in energy infrastructure and reducing
the supply options for American consumers at the very time when the
industry needs new investment most.
I have just returned from spending a week on the ground in
California, observing first-hand the chaotic situation in that State.
The causes of the California energy crisis are numerous and complex,
but I believe they can be tied to two core problems--(1) lack of
adequate investment and infrastructure in the energy sector and (2)
regulatory policies that distort energy markets.
Concerning investment and infrastructure, California enters this
summer approximately 5,000 megawatts short of expected peak demand.
Even with heroic efforts to reduce demand, it will be difficult for the
State to avoid blackouts this summer. Critical shortcomings in electric
transmission such as the well-examined bottleneck along ``Path 15''
reduce the ability of the system to move power efficiently.
With regard to regulatory policies that distort energy markets,
California took a number of steps which proved disastrous. In the name
of reducing concerns about utility market power, the State either
compelled or encouraged large-scale generation divestitures by the
incumbent utilities and required those utilities purchase power in the
volatile spot market. The State restructuring legislation also mandated
significant rate reductions that discouraged new entrants from
competing for retail customers. Combined with PUHCA's limitations on
selling electricity generated by exempt wholesale generators (EWG's) at
retail and the inadequacy of available transmission and generation,
this helped smother retail competition at the residential level in its
infancy. Also, almost all observers would agree with my view that the
State's failure to preemptively address the excessive bureaucracy in
its plant siting and environmental review procedures was a major
shortcoming in California's restructuring plan.
In its review of the energy situation in California and the West
last year under Chairman Hoecker, FERC found, ``there is little doubt
that the most crucial task ahead is to ensure that a robust supply
enters this market, both now and in response to any future price
signals.'' Nationwide, data from the North American Electric
Reliability Council (NERC) project electric reserves of only 11.48
percent in 2001, with electric demands increasing by more than 2
percent per year. Typically, a 15 percent reserve is considered to be
the minimum to ensure reliable service. Conservative estimates show
that more than $76 billion will need to be invested in the sector by
the end of the decade to assure reliable service.
As this Congress considers the actions it can take to ease the
energy crisis in California and the West, I believe you will see that
PUHCA contributes to both of these problems. The law can and should be
repealed, and only Congress can do so. To do otherwise would leave a
Federal statute on the books that will continue to inhibit investment
and distort markets in the West and throughout the country. The results
of California's failure to address these issues in advance of the onset
of full retail competition should be a warning to Congress about the
need to move quickly on removing barriers to investment and market
entry. On a more specific level, I would like to provide the
Subcommittee with two concrete examples of how the Act prevents actions
that could help alleviate the California electricity crisis.
Last summer, we at MidAmerican began to see signs foreshadowing the
severe problems that have afflicted the California electricity market.
The investor-owned utilities in the State had already begun to suffer
financially from the impacts of soaring wholesale electricity costs and
capped retail rates. Since MidAmerican is a privately-held company
whose largest shareholder is Berkshire Hathaway, we enjoy the benefit
of substantial financial resources and the ability to take a long-term
investment horizon. We gave serious consideration to a number of
options that would have involved MidAmerican taking an equity position
in the California utilities while working with the State to return the
market to long-term viability.
Every scenario we reviewed ran into the same roadblock--the Public
Utility Holding Company Act. MidAmerican is exempt from the most
intrusive regulatory restrictions of the Act because its regulated
utility business is primarily in one State, Iowa. However, MidAmerican
could not acquire more than 4.99 percent of the equity in any of the
California utilities without running afoul of PUHCA on several fronts.
It also is my understanding that a number of other utilities considered
taking similar actions either individually or as part of a consortium,
but ran into the same PUHCA roadblock.
First, the physical integration requirements of PUHCA would have
required MidAmerican to demonstrate that it could physically
interconnect its utility systems in the Midwest with those of the
California utilities. This is an impossible standard for MidAmerican to
meet. Any other public utility, registered or exempt, operating within
the eastern two-thirds of the United States would run into the same
barrier.
Second, even if we could have solved the problem of the physical
integration requirement, MidAmerican would have been forced to become a
registered holding company under the Act. This probably would have
required the Company to separate itself from Berkshire Hathaway or have
Berkshire divest itself of all nonenergy related assets. I am sure I do
not have to explain to the Members of the Senate Banking Committee why
neither of those options was even momentarily considered.
In fact, the arrangement that allows Berkshire's interest in
MidAmerican is probably the most extreme example of the so-called
``PUHCA pretzel'' where holding companies are forced to contort
themselves organizationally to avoid violating the law or registration
under the Act. Berkshire Hathaway owns approximately 90 percent of the
equity in MidAmerican, yet controls less than 10 percent of the voting
interest in the company. Mr. Walter Scott, also of Omaha, holds the
majority of the control of the Company at the Board level. Only by such
structuring could Berkshire Hathaway make an investment in a regulated
utility and avoid having to divest itself of its diversified holdings.
This arrangement works because of the extraordinary level of trust and
respect among the small number of owners of Mid-
American, but it should not be necessary. The Company is structured
this way for one reason and one reason only--the arbitrary requirements
of PUHCA.
I hope you will take a moment to reflect on the absurdity of this.
Berkshire Hathaway is one of the most financially stable private
entities in the world, with a AAA bond rating. A Federal law enacted
more than 65 years ago with the intent of protecting investors keeps
MidAmerican and Berkshire out of California's utility market and almost
prevented Berkshire from investing in MidAmerican. At the same time,
the California utilities are unable to pay their dividends or even
their bills, with cascading effects throughout the economy.
Another example pertains to our interest in expanding the Company's
Imperial Valley geothermal plants. These plants currently provide the
California electricity market with approximately 300 megawatts of
baseload, emissions-free, renewable electricity. We would like to
double the size and output of these facilities, providing desperately
needed electricity to the California market.
In order to get this electricity to consumers in Southern
California, additional transmission will need to be built. As you are
well aware, the State's investor-owned utilities are in no financial
condition to undertake this type of project. The obvious answer would
be for CalEnergy to make the investment in the transmission lines
necessary to connect these plants to electricity consumers.
Unfortunately, PUHCA may stand in our way.
Being an owner of a transmission facility in California creates
similar PUHCA problems to investing in a California utility. Once
again, the Company would be faced with maneuvering around the physical
integration standard and dealing with Berkshire Hathaway's diversified
portfolio. There may be some way around these problems, and we will
explore every option to find a way to complete this expansion.
Nonetheless, the existence of this unnecessary, outdated law makes it
far more difficult to invest in this critical industry.
One final item the Subcommittee should consider related to
California is what will happen to the utility companies in the State
once stability is returned to the marketplace. These companies face a
long climb back to fiscal health, and will have a difficult time
raising capital for new infrastructure. Yet, PUHCA will prevent most if
not all domestic utilities, and discourage nonutility companies, from
making equity investments in these companies for the reasons already
discussed.
Where will needed capital come from? I anticipate one of three
sources. First nonutility companies could make these investments, but
these companies will not have the benefit of prior experience in the
industry and will be impeded by PUHCA just as Berkshire Hathaway. Federal
or State governments are another possible source of capital. But, the
political issues would seem to make that unlikely. The most likely
scenario, I believe, is that foreign utility companies looking for a
foothold in the U.S. market will take long looks at these companies.
Since these companies are not restricted by the physical
integration requirement on their ``first bite'' entry into the American
market, they will enjoy a substantial advantage in the mergers and
acquisitions market. I am not making a case against international
investment. In fact, I strongly support it. But outdated, unnecessary
laws should not hamstring American companies in this competition. Are
there any good reasons not to repeal PUHCA? I do not believe so.
(1) The SEC has consistently supported PUHCA repeal for almost 20
years. Speaking on behalf of the SEC at a hearing of the House
Subcommittee on Finance and Hazardous Materials, Commissioner Isaac C.
Hunt, Jr. testified, ``by the early 1980's, the SEC had concluded that
the 1935 Act had accomplished its basic purposes, and its remaining
provisions, to a large extent, either duplicated State or Federal
regulation or otherwise were no longer necessary to prevent the
recurrence of the abuses that led to its enactment . . . Therefore, the
SEC unanimously recommended that Congress repeal the statute.''
Commissioner Hunt continued, ``In the summer of 1994, the SEC
staff, at the direction of Chairman Arthur Levitt, undertook a study of
regulation of public utility companies which culminated in a June 1995
report. Based on the report, the SEC has recommended that Congress
consider three legislative options for eliminating unnecessary burdens.
The preferred option is repeal of the 1935 act, accompanied by the
creation of additional authority to exercise jurisdiction over
transactions among holding company affiliates. This course of action
will achieve the economic benefits of unconditional repeal and also
protect consumers.'' That is exactly the approach embodied in S. 206.
(2) The bipartisan leadership of this Subcommittee also has
consistently supported repeal. It is a tribute to the ability of this
Subcommittee to work on a bipartisan basis toward good policy goals
that both the Senator and Ranking Democrats on the Banking, Finance and
Urban Affairs Committee are cosponsors of this bill. I believe it is
also a testimony to the strength of the arguments for PUHCA repeal that
senior Members of the Subcommittee who have heard both sides for years,
join in support of PUHCA repeal.
(3) Federal Energy Regulatory Commissioners have consistently
supported repeal. On March 20, 1997 FERC Chair Elizabeth Moler, a
Democratic appointee, testified, ``as presently structured, the Public
Utility Holding Company Act inhibits competition. Congress should
eliminate these impediments. Utilities need the freedom to pursue
structural changes without facing antiquated rules that do not easily
accommodate current policies favoring competition.'' At the same time,
Independent Commissioner, Donald Santa, Jr. testified, ``this
anachronistic Federal statute no longer serves any useful purpose and,
in fact, is an impediment to greater competition in electricity
markets.'' The current Chairman of FERC, Curt Hebert, is also a strong
proponent of PUHCA repeal.
PUHCA repeal will make it easier for FERC to continue policies to
promote efficient, competitive wholesale markets. PUHCA is premised on
geographically limiting utility companies while at the same time FERC
is working to reduce market concentration.
The limits PUHCA places on FERC's ability to promote competitive
wholesale electricity markets are even more apparent today. PUHCA
inhibits utilities' efforts to comply with FERC Order 2000 to establish
independent regional transmission organizations (RTO's). Every
nonutility participant in the electricity debate favors the
establishment of RTO's to ensure the most efficient use of the electric
transmission system and to guarantee that utilities do not use control
of the transmission system to distort wholesale electricity markets.
Every consumer group, every industrial user group, public power
entities and rural coops all strongly support moving forward with
RTO's.
Many utilities, including MidAmerican Energy, are working to
establish independent transmission companies, or ``transcos,'' that
would provide for efficient management of transmission networks in large
regional markets. As FERC strongly prefers that these organizations be
large, multistate companies, they will be subject to PUHCA's restrictions.
This discourages investment and delays the day we will see operational
control of transmission fully separated from competitive market
functions.
(4) PUHCA repeal is pro-consumer. Repealing PUHCA will allow new
investment, new ideas and new efficiencies in the electric and gas
industries at a time when these are needed most. Last year, MidAmerican
commissioned an independent study by the highly respected econometrics
firm Analysis Group/Economics. Using the most conservative possible
estimates, the study demonstrated directs costs to the economy of
hundreds of millions of dollars annually from PUHCA. Other surveys that
have attempted to quantify lost opportunity costs in the industry have
estimated a multibillion dollar annual drag on the economy from PUHCA.
I am pleased to provide our study to Members of the Committee for your
review.
Why then has PUHCA not been repealed yet?
Because PUHCA repeal is a hostage to other aspects of the larger
electricity debate. Other stakeholders in the industry have sought to
use PUHCA as leverage to achieve their goals in energy policy. I do not
say that in an accusatory sense. That is the way the game is often
played, and MidAmerican has taken a leadership role in trying to
resolve policy differences on the full range of these issues.
Those efforts can and should continue, but I believe both Congress
and the stakeholder community need to step forward and focus on what
they support and are willing to help get passed. We need to end the
politics of stalemate where interest groups have focused more on
blocking progress on one another's priorities than on moving forward
with good policy. Unfortunately, the losers in this hardplayed game
have been America's energy consumers.
Mr. Brunetti's company, Xcel Energy, is a registered holding
company subject to the most stringent restrictions of PUHCA. In spite
of the fact that our companies are regional competitors on the
wholesale market, I support his company being removed from PUHCA's
onerous restrictions. He supports my company being able to expand
beyond its limited geographical scope and become a larger competitor in
the Midwest and Great Plains. By removing both our companies from PUHCA
constraints, you will enable each of us to compete more aggressively,
operate more efficiently and serve consumers better.
Last year, I joined Mr. Warren Buffett in discussing PUHCA repeal
with House and Senate leaders. In those meetings, we warned that the
energy sector was headed for a train wreck in either California or the
Midwest. I don't take any pleasure in being right in that prediction,
but I hope you will understand why I believe so strongly Congress must
act now.
The political game that has held PUHCA repeal hostage has been
well-played on all sides, but the big loser has been the American
consumer. It's time to change the way the game is played. I thank you
for the opportunity to testify this morning and ask you to support S.
206.
----------
PREPARED STATEMENT OF CHARLES A. ACQUARD
Executive Director, National Association of
State Utility Consumer Advocates (NASUCA)
March 29, 2001
Introduction
Good morning Senator Enzi and Members of the Subcommittee. I am
Charlie Acquard, Executive Director of the National Association of
State Utility Consumer Advocates (NASUCA). NASUCA is an association of
41 consumer advocate offices in 38 States and the District of Columbia.
Our members are designated by laws of their respective States to
represent the interests of utility consumers before State and Federal
regulators and in the courts. On behalf of the members of NASUCA, I
wish to thank you for the opportunity to testify before this
Subcommittee on the Public Utility Holding Company Act of 1935.
First I would like to commend the Subcommittee for holding this
hearing. As more States consider, implement (or reject), and reassess a
move toward a more competitive electric generation industry, it is
essential that Federal and State lawmakers continue to review those
laws and regulatory actions that will either protect or harm consumer
interests in the context of the larger debate on the structure of the
industry.
The question before this Subcommittee today is on the future of the
Public Utility Holding Company Act. Yet, this issue cannot be examined
outside the context of the entire framework of the electric utility
industry without considering the market implications for consumers and
competitors alike. No one has to tell this Subcommittee that the
electric utility industry is in the midst of substantial change,
uncertainty, and, in some places, turmoil. It is a front page, six
o'clock lead news story. Anybody involved with this industry cannot
escape the over-the-backyard-fence or soccer-sideline inquires from
concerned neighbors about the possibility of what is going on out there
happening here. So examination or possible elimination of key industry
underpinnings cannot be done in a vacuum or viewed through the narrow
prism of simply securities regulation. Rather, any discussion of
substantial alteration of PUHCA must be considered in the context of
the potential impact on industry structure, market power, and,
ultimately, consumers.
NASUCA Resolutions
In a series of resolutions dating back almost 20 years, NASUCA has
urged Congress to exercise the greatest caution in response to efforts
to dismantle the consumer protections contained in PUHCA. Specifically,
NASUCA continues to oppose changes to PUHCA that would reduce consumer
protections in the Act at this time. NASUCA urges Congress and the SEC
not to take any action that would weaken the Act without first ensuring
that public utility holding companies are either subject to effective
competition or subject to effective regulation, where effective
competition does not yet exist or where competition would not induce
efficiency, reduce costs and advance consumer interests.
Our resolutions recognize that public utility holding companies and
their subsidiaries are affected with a national public interest and
that their activities extending over many States are not susceptible to
effective control by any individual State. We also recognize that
neither the electric industry nor the natural gas industry has a fully
competitive market structure and that utility market power remains
pervasive. We conclude that, if PUHCA were repealed today in the manner
proposed in S. 206, neither the remaining regulatory scheme nor the
current State of competition would be sufficient to protect consumers.
Until utility market power is eliminated, consumers must be protected
by effective regulation, which includes the provisions of PUHCA.
In NASUCA's view, effective regulation of multistate public utility
holding companies requires both rate reviews and structural reviews,
with a rational allocation of responsibility between State and Federal
decision-makers.
NASUCA recognizes that effective competition benefits consumers
through greater efficiency and reduced costs. We also note, however,
that deregulation under conditions of unfettered market power harms
consumers. As such, our resolutions do not suggest that PUHCA must
remain in its current form indefinitely. Rather, it cautions Congress
and the SEC to take no action to weaken PUHCA without first ensuring
that either effective competition or effective regulation is in place
to protect consumers.
Our concerns are not held alone. In fact, every consumer group that
I am aware of is opposed to repeal of the Act if not accompanied by
effective provisions to promote sustainable, competitive markets. I
have attached a list of groups who have been on record opposing PUHCA
repeal.
S. 206
The legislation before us does not adequately address the concerns
of consumer advocates across the Nation. Moreover, S. 206 would
significantly worsen the problems associated with monopoly power. For
example:
1. Repeal of PUHCA's integration requirement:
Weakens the ability of State regulators to protect ratepayers
(and State econ-
omies) from monopoly abuse. A State's ability to ensure least cost
service is fur-
ther confounded when the franchise owner is headquartered in
another State or
country.
Opens the door to expanded opportunities for forum shopping
and Federal preemption of State commissions in the assignment of
generation or other costs which could be required by the FERC in
light of the Mississippi Power & Light Co. v. Mississippi Ex Rel.
Moore, Atty, 487 U.S. 354 (1988) court decision.
Could increase the potential for nationwide or regional market
concentration through unrestricted acquisitions of noncontiguous
utilities by companies already holding substantial market power
without competition for, or in their own service territories at the
very time when we should be guarding against potentially
anticompetitive behavior. Elimination of competitors at the current
pace has the potential to restrict competition and could
artificially inflate prices paid by consumers if retail competition
is implemented.
2. With repeal or easing of restrictions on utility
diversification, the complexity of tracking and allocating costs and
preventing cross-subsidization reaches a new level of difficulty. The
goal of PUHCA modernization should be to reduce overly burdensome
regulation. By repeal of PUHCA diversification provisions, S. 206 would
have the opposite effect by increasing the regulatory burden.
3. There will be a significant increase in complex holding company
structures. This would make it much more difficult to detect and
deflect inappropriate interaffiliate transactions between competitive
and monopoly business components, or to prevent conflicts of interest,
anticompetitive behavior or other market power abuses.
4. As a result of their retail franchises and access to customers
and information, electric utility holding companies retain an
unmistakable advantage in many nonutility markets. Without addressing
the fundamentals of this market power problem, S. 206 would permit
utilities to harm competition in both utility and nonutility
businesses. As a result, economic efficiency would be reduced,
consumers harmed and small companies put out of business.
5. As evidenced in the SEC survey of State utility commissions
complete a few years ago, many State regulators lack adequate authority
to fill in regulatory gaps left by PUHCA repeal. Moreover, even if
States have legal authority to fill the gaps, they may not have the
resources, particularly as franchise owners become highly diversified
and geographically distant, as S. 206 would permit.
While it is laudable that S. 206 includes a continued Federal
presence in policing interaffiliate transactions, audits and access to
books and records, it falls short in providing all of the necessary
tools to the FERC with respect to policing interaffiliate transactions.
It even exempts key affiliates from having to provide access to books
and records. This legislation eliminates two provisions, the provisions
addressing diversification and the integration limitations, which
remain at the heart of the Act today despite the representations of
some registered holding companies.
Proponents of repeal or major modification of PUHCA have
incorrectly characterized the nature of the electricity industry today:
It is not, as is claimed, a competitive industry. In fact, even in
States that have restructured, little or no competition actually
exists. Regulation, in the form of price caps and reductions, is the
only tool that has resulted in lower prices for consumers. Furthermore,
State regulation is not, contrary to repeal proponents, sufficient to
protect consumers in the absence of a Federal statute regulating
multistate public utility holding companies.
The factor motivating Sam Rayburn in 1935 to take on the power
trusts and push for enactment of PUHCA--market power--still exists in
the 2001. Since 1935, the structure of the industry has been greatly
influenced by the Act. Changes in PUHCA, without ensuring effective
competition and effective regulation in those sectors where each (or
both) is appropriate, will harm consumers.
Market Power
Congress and Federal agencies must address the need to mitigate
market power. The exercise of market power is likely in industry
structures that include natural monopolies over essential facilities
such as transmission and distribution systems, or in joint ownership of
monopoly and potentially competitive businesses. In the electricity
industry today, these conditions remain. These conditions are not
present in other industries, where there is no exclusive franchise to
sell at retail.
If Congress repeals PUHCA and its integration requirement without
tying relief to a showing of effective competition or divestiture, then
these very large utility companies can expand their monopoly customer,
billing, transmission and distribution monopolies at will to ward off
competitors. This places such utilities at a tremendously unfair
advantage prior to the onset of competition and will allow the utility
to acquire other utilities and their service territories without facing
competition within their own service territory or realistically be
subject to acquisition by even larger competitors.
And, contrary to claims you may hear, PUHCA does not in any manner
prevent or limit the ability of utilities to build generation.
Wholesale generators--or EWG's--are specifically exempted from the Act.
So repeal of PUHCA will do nothing to alleviate the current energy
crisis. In fact, repeal, as stated above, would only exacerbate
monopoly power and manipulation of markets.
Where there are monopolies, especially with government-granted
utility service franchises, the primary obligation is to core
customers. No costs associated with an off-system investment, or with
regulating such an investment to protect captive customers, should be
borne by ratepayers. Unfortunately, effective means for denying the
pass-through of unwarranted interaffiliate costs for multistate holding
companies do not always exist at the State level. In fact, the
Mississippi Power and Light court decision (Mississippi Power and Light
Co. ex rel Moore) places consumers at continued and expanded risk from
harm as a result of inappropriate costs potentially being allocated by
a Federal agency even if the State has denied prudence of such costs.
This may increasingly be the case as holding companies acquire
disparate service territories. S. 206 does nothing to correct this
regulatory gap. The very existence of such a regulatory gap will place
consumers at risk.
Proponents of repeal argue that structural review is unnecessary
because rate regulators can protect consumers. That is simply not the
case. Rate review and structural review are complementary, and both are
vital in ensuring fair rates and in preventing abuses. For example, PUHCA
prevents holding companies from abusing corporate form to benefit their
shareholders at the expense of consumers and competitors. They were
designed as such when Congress enacted the twin Federal Power Act and
PUHCA statutes. After-the-fact rate regulation alone cannot prevent or
correct large investment errors, which may harm the ratepayers and
the general public.
Second, State commissions do not have or may be prevented from
using all the necessary tools to prevent harms to ratepayers and the
public. For instance, the SEC/NARUC survey indicates that many States
lack the legal authority to prevent certain out-of-State affiliations
by a holding company located in another State, but owning the operating
utility in the PUC's jurisdiction. In addition to the Mississippi Power
and Light decision, other gaps include Ohio Power v. FERC, 954 F.2d 779
(D.C. Cir), cert. denied, 113 S.Ct. 483 (1992). While S. 206 appears to
address the Ohio Power gap prospectively, it does nothing to address
the regulatory gap created by MP&L.
Finally, States may not be the only appropriate jurisdictions to
decide when a particular acquisition of a distant utility creates too
much market power or concentration of control. So, structural
regulation of multistate holding companies still requires a Federal
role in addressing interaffiliate transactions, acquisitions of
nonutility subsidiaries, acquisitions of distant utility companies, and
mergers. Given current flaws in the structure of electricity markets,
these changes are too substantial to adopt without ensuring the
appropriate mix of effective regulation and effective competition.
After all, it is PUHCA itself, with its structural protections and
outright bans of certain actions, transactions and behaviors that
cannot be replaced or matched by S. 206 or other poor substitutes. Some
parts of PUHCA still prevent anticompetitive and anticonsumer behavior.
The Committee should take a closer look at who is for and against
stand-alone PUHCA repeal. The primary proponents of repeal are most of
the registered holding companies and the SEC. Opponents include the
Consumers for Fair Competition, all major consumer groups, representing
residential, commercial and industrial customers, heating and air
conditioning contractors, municipal electric and cooperative
organizations, the National Association of Regulatory Utility
Commissioners, and many other organizations.
Conclusion
I would like to conclude by urging this Subcommittee to consider
any changes to the Public Utility Holding Company Act be done only in
the context of the larger structure of the industry. As you have heard,
the industry is evolving and that evolution has not been painless. We
must first determine the appropriate market structure and nature of
competition within the industry to evaluate the appropriate methods for
balancing effective competition and effective regulation. If this is
not achieved, consumers will not benefit, and will likely bear the
brunt of any deregulatory actions.
NASUCA urges the Subcommittee not to repeal or weaken the consumer
protections in PUHCA as embodied in S. 206 or other legislation without
first ensuring that public utilities are subject to effective
competition, or effective regulation, where competition would not
induce efficiency, reduce costs and advance the interest of consumers.
Legislation such as S. 206 does not meet such a standard.
Such legislation is inappropriate. At both the State and Federal
levels throughout the Nation, the structure of the electric and gas
utility industries are being debated. However, it is still unclear what
will be the outcome in many States. If we have learned anything from
California, it is that the world is evolving in ways which we cannot
anticipate the results. To repeal the anti-empire building statute at
such a time when structural abuses could become the order of the day
would be dangerous.
Thank you again for the opportunity to speak on behalf of NASUCA.
PREPARED STATEMENT OF MARTY KANNER
Coordinator, On Behalf of Consumers for Fair Competition
March 29, 2001
Consumers for Fair Competition (CFC)--an ad hoc coalition of
residential and industrial consumer representatives, small business
interests, local regulators, public interest groups, and public and
private utilities--was formed to advance policies necessary to promote
effective competition. The coalition believes meaningful competition
will not take hold or survive if steps are not taken to address the
market dominance of incumbent utilities.
You will hear assertions that the Public Utility Holding Company
Act (PUHCA) is no more than an out-dated statute intended to protect
investors from fraudulent securities practices. Do not be misled.
Congress enacted PUHCA as a companion statute to the Federal Power Act.
PUHCA establishes passive restraints on the structure of the electric
utility industry in order to mitigate market power, preclude practices
abusive to captive consumers, and facilitate effective regulation.
Stand-alone PUHCA repeal, as embodied in S. 206, eliminates these
structural protections. Moreover, they do not include the policy
prescriptions needed to promote meaningful competition. Such action
will expose captive consumers to a myriad of potential risks. Rather
than ushering in competition as repeal proponents would have you
believe, stand-alone PUHCA repeal will have substantial anti-
competitive repercussions and retard the development of a vibrantly
competitive electricity market.
The current administration of PUHCA has clear limitations. However,
its underlying purpose--the mitigation of market power and prevention
of interaffiliate transactions and utility diversifications that
threaten captive ratepayers--is the best policy option for a successful
transition to a competitive marketplace. It is for that reason that
every major consumer group--as well as numerous other interests--
opposes stand-alone PUHCA repeal.
CFC has prepared provisions to provide the necessary checks on
potential anticompetitive behavior. With adoption of these provisions,
Congress could repeal PUHCA.
Underlying Purpose of PUHCA
As noted above, PUHCA establishes certain structural safeguards to
protect consumers and facilitate effective rate regulation. Under the
Act:
Multistate utility holding companies must be physically and
operationally integrated in order to ensure economic benefits and
facilitate effective regulation;
Holding company acquisitions are limited in order to promote
economic and operational efficiencies and prevent undue
concentration;
Multistate utility holding company diversification activities
are restricted in order to maintain a focus on the core business of
utility service to captive consumers, limit financial risks to
ratepayers, and protect businesses in unregulated industries from
anticompetitive cross-subsidies;
Inter-affiliate transactions are limited in order to prevent
undue favoritism and self-dealing; and
Capital structures and holding company investments are
regulated in order to protect captive ratepayers from unwarranted
financial risk.
Proponents of PUHCA repeal would have you believe that the Act only
regulates the multistate holding companies that are ``registered''
under the Act. In fact, PUHCA's ``passive restraints'' effectively
regulate the corporate behavior of the remaining investor-owned
utilities that have structured their operations in a manner designed to
avoid the restrictions applicable to registered holding companies.
In some cases, the benefits outlined above have been diluted by lax
regulation by the Securities and Exchange Commission (SEC) or
circumscribed by targeted amendments adopted by Congress. But such past
actions do not justify wholesale repeal. Rather they require a careful
consideration of the following questions:
What structural protections are needed to facilitate and
maintain a competitive market?
What form, extend and duration of regulation is needed in a
competitive market?
Are further targeted amendments to PUHCA sufficient to redress
a regulatory redundancy or changed circumstances?
What--as noted economist Alfred Kahn put it--is the best
possible mix of inevitably imperfect regulation and inevitably
imperfect competition?
Consumer Protections Are Still Needed
Proponents of stand-alone PUHCA repeal argue that the statute is
unneeded, a relic of a bygone day when all functions of the industry
were monopolistic, State commissions were in their infancy, and securities
regulation was undeveloped. As Congressman John Dingell once noted:
``times have changed, but human nature has not.''
It is not ``evil'' that businesses seek market dominance. It is the
nature of business. The difference between the utility industry and
other businesses, however, is the continued monopoly structure of
distribution and transmission function (and the retail energy service
business in many States). This straddling of monopoly and competitive
markets warrants continued structural protections.
An office supply store might cross-subsidize staplers with paper
clips, but a dissatisfied customer can always go elsewhere to buy paper
clips. A company might diversify into another business line and face
financial losses or even ruin--but there are no captive customers that
suffer the consequences.
A dissatisfied utility customer cannot simply shop elsewhere; nor
is that customer insulated from the bad business decisions of its
supplier. Closer scrutiny reveals that consumers can face considerable
risks under stand-alone PUHCA repeal.
1. Financial Repercussions of Poor Financial Practices
As noted above, PUHCA discourages diversification into nonutility
businesses and regulates capital structure. In the absence of these
protections, holding companies can diversify into risky ventures,
pledge utility assets as collateral, and loan funds from utility
operations to nonutility affiliates. Such actions can raise the cost of
capital for the utility, siphon funds that should be invested in the
core utility operations, and result in unnecessarily high rates.
None of the pending PUHCA-repeal proposals requires holding
companies to exclusively use nonrecourse debt, preclude interaffiliate
loans, or otherwise insulate captive consumers from risky financial
transactions.
2. Cross-Subsidization Taxes Consumers
Holding companies can subsidize nonregulated ventures with captive
ratepayer funds or resources.
For instance, a holding company could establish an affiliate to
market surplus power from its generating facilities. The underlying
costs of the facilities are paid by captive ratepayers. The affiliate
marketer simply covers the variable cost of production and captures
significant profits--for the holding company--from its power sales. The
stand-alone PUHCA repeal proposals do not affirmatively prohibit cross-
subsidization, and State regulation is inadequate to prevent siphoning
of ratepayer dollars in a holding company structure.
3. Consumers Fail to Benefit From Successful Diversification
As noted above, consumers face potential risk from failed
unregulated ventures. They also may benefit--through lower rates--if
such ventures are successful.
A holding company could transfer a formerly rate-based, low-cost
generating plant to an unregulated marketing affiliate--without pre-
approval by all the relevant State commissions--for the embedded cost
of the facility, thereby denying captive retail customers of the
economic benefit of the facility and potentially exacerbating stranded
cost exposure.
Alternately, a holding company could build a fiber optic system,
with a small portion used for core utility operations (such as load
control), and the remaining capacity operated as or leased to a
competitive telecommunications provider. Given the economies of scale
in fiber optic cable, captive utility customers could pay the majority
of the underlying costs and not receive the economic benefits of the
use of the remaining facilities.
The PUHCA repeal proposals limit State commission review of the
transfer of assets and fail to require fair compensation to consumers
for the transfer of ratepayer financed assets.
4. Captive Retail Service Becomes the Poor Stepsister
The provision of quality, affordable retail electric service to
captive customers is likely to suffer. Holding companies will transfer
the best and brightest personnel to those affiliates that hold the
greatest potential for financial reward. Local utilities may become the
corporate backwater.
One registered holding company established a subsidiary to manage
and operate nuclear plants for other utilities. Despite assurances to
local regulators, the top nuclear personnel of the utility spent most
of their time on the subsidiaries activities, potentially degrading the
operation and economic efficiency of the ``core'' utility's nuclear
plants. Given the limited resources of regulatory agencies and the
difficulty of tracking personnel, neither State commission nor FERC
rate regulation can remedy such actions.
Competitive Protections Are Still Needed
The structural restrictions of PUHCA not only protect consumers,
they also encourage fair competition.
1. Competitors Protected From Unfair Cross-Subsidization
By limiting diversification into nonregulated businesses, PUCHA
protects competitive industries from the entrance of players that can
tap monopoly markets for unfair competitive advantage.
In the absence of PUCHA, a holding company could establish an
affiliate, as outlined above, to market surplus power from rate-based
facilities, with the affiliate simply covering the variable cost of
production. In such a circumstance, a nonutility competitor would have
to sell power at a rate that recovered both fixed and variable cost,
while the holding company affiliate had its fixed costs subsidized by
captive ratepayers. Holding companies could similarly use ratepayer-
financed equipment, personnel and information to cross-subsidize entry
into a host of energy services businesses. None of the PUHCA-repeal
proposals protect competitors from unfair cross-subsidization.
2. Undue Favoritism to Affiliates
As a result of their monopoly status, utilities possess access to
key customer information. For instance, a utility could have exclusive
knowledge of the operational efficiency (and potential market for cost-effective upgrades) of the motors of an industrial customer. Such
information would provide an affiliate energy services company with an
unfair competitive advantage. Similarly, knowledge of customer
consumption patterns, price sensitivity, and power quality requirements
could provide advantages to affiliate equipment suppliers, equipment
installers, and retail marketers. This information can be passed on
directly to affiliates, or through the transfer or rotation of key
personnel. None of the PUHCA repeal proposals require holding companies
to provide competitors with comparable access to information obtained
from monopoly affiliates.
3. Market Concentration
Registered holding companies are dominant market players. One even
made light of this fact in its annual report--musing that it was an
800-pound gorilla.
Repeal of PUHCA facilitates increased growth and market
concentration. While intermittently enforced, the Act requires
acquisitions to advance the public interest, provide enhanced economic
and operational efficiency, maintain physical integration and not
result in undue concentration. Absent these requirements, the industry
is likely to further consolidate. Holding company acquisitions of
distant utilities are unlikely to be reviewed by the State regulators
of the acquiring holding company--due to a lack of legal authority--and
even FERC's revised merger guidelines do not appear to discourage such
actions. Moreover, FERC lacks legal authority to review holding company
to holding company mergers.
In addition, PUHCA precludes the acquisition of gas utilities by
registered electric holding companies (or electric utilities by gas
holding companies). The authority of FERC to review such
``convergence'' mergers is limited. If PUHCA is repealed on a stand-
alone basis, the industry is likely to become dominated by a few large
companies--the antithesis of a competitive market, which is
characterized by a multiplicity of participants and the absence of
barriers to market entry. The proposals before you fail to revise
FERC's merger authority to screen the competitive implications of
proposed mergers or establish clear authority to review gas and
electric combinations or holding company to holding company mergers.
4. Selective Market Entry
Stand-alone PUHCA repeal will enable holding companies to
participate in those retail markets that are open to competition--
either as pilot projects or under State retail competition plans. As
noted above, it is possible for these competitive ventures to be cross-
subsidized by captive retail customers of the holding company. But
while holding companies will receive the potential benefits of retail
competition, they are not subject to the challenges of competition in
their ``home'' market. Stand-alone PUHCA repeal enables holding
companies to leverage government-sanctioned market power--their retail
monopolies--to engage in competitive markets.
The Case for Stand-Alone PUHCA Repeal is Not Compelling
Proponents of stand-alone PUHCA repeal advance a variety of very
unconvincing arguments.
They argue that the Act was only intended to protect
investors, ignoring the clear--and expressly intended--consumer
benefits;
They argue that it will advance competition, ignoring the
potential anticompetitive consequences;
They argue that PUHCA discourages domestic investment, while
ignoring the myriad of legal, domestic investment opportunities and
their own business decisions to invest abroad in search of higher
returns;
They argue that States will be the primary protectors of
consumers, while ignoring--and not redressing--the legal
limitations of State commissions.
To the extent that PUHCA poses legitimate restrictions--for
instance duplicative securities regulation or an inability to purchase
generating assets for direct sales in competitive retail markets--then
Congress should consider targeted amendments; not wholesale repeal.
How to Advance Consumer and Competitive Interests
PUHCA repeal, in the absence of appropriate safeguards, will harm
consumers. And the transition to competition will fail if a competitive
structure is not established. CFC has drafted model legislation to
guide Congress in moving toward a competitive market.
The coalition urges Congress to:
Ensure that the transmission grid operates independent of
electricity market participants;
Alleviate overly-concentrated generation markets that will
sustain high prices, entry barriers and inefficient markets;
Scrutinize the competitive implications of all utility
mergers;
Provide enforceable standards to prevent utility cross-
subsidization.
These authorities would be tied to the competitive condition of the
marketplace. Regulatory action would trigger only when the likelihood
of market failure was present.
Conclusion
Stand-alone PUHCA repeal should not be seen as the ``appropriate
first step'' toward competition. True competition rewards efficiency
and penalizes inefficiency. Stand-alone PUHCA repeal provides utility-
holding companies with the benefits of competition, without the
associated risks. The risks are borne by consumers and competitors.
Given these severe policy implications, PUCHA repeal must be
considered only within the context of comprehensive legislation. In
that way, Congress can determine the extent and form of regulation
needed to supplement the discipline of a competitive market.
The members of Consumers for Fair Competition stand ready to assist
this Subcommittee in crafting those policies needed to promote
effective competition and consumer protection.