[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                     PUHCA REPEAL: IS THE TIME NOW?

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                    FINANCE AND HAZARDOUS MATERIALS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 7, 1999

                               __________

                           Serial No. 106-68

                               __________

            Printed for the use of the Committee on Commerce



                     U.S. GOVERNMENT PRINTING OFFICE
60-358 CC                    WASHINGTON : 1999



                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

            Subcommittee on Finance and Hazardous Materials

                    MICHAEL G. OXLEY, Ohio, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     EDOLPHUS TOWNS, New York
  Vice Chairman                      PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio                BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania     ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma              THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California         BILL LUTHER, Minnesota
GREG GANSKE, Iowa                    LOIS CAPPS, California
RICK LAZIO, New York                 EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois               RALPH M. HALL, Texas
HEATHER WILSON, New Mexico           FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona             BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri                    (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Heaton, Sharon, Vice President and Deputy General Counsel, 
      Columbia Energy Group......................................    24
    Hunt, Isaac C., Jr., Commissioner, Securities and Exchange 
      Commission.................................................    11
    Kanner, Marty, Campaign Coordinator, Consumers for Fair 
      Competition................................................    55
    Lhota, William J., Executive Vice President, American 
      Electric Power Company, on behalf of Repeal PUHCA Now! 
      Coalition..................................................    41
    Quirk, Sherry A., Shareholder, Verner, Liipfert, Bernard, 
      McPherson, & Hand, on behalf of New Orleans City Council...    61
    Smith, Douglas W., General Counsel, Federal Energy Regulatory 
      Commission.................................................     5
Material submitted for the record by:
    Halvorsen, Jerald V., President, Interstate natural Gas 
      Association of America, letter dated October 20, 1999, to 
      Hon. Mike Oxley............................................    76
    National Alliance for Fair Competition, prepared statement of    78
    Plumbing-Heating-Cooling Contractors--National Assocation, 
      prepared statement of......................................    82

                                 (iii)

  


                     PUHCA REPEAL: IS THE TIME NOW?

                              ----------                              


                       THURSDAY, OCTOBER 7, 1999

                  House of Representatives,
                             Committee on Commerce,
           Subcommittee on Finance and Hazardous Materials,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2123, Rayburn House Office Building, Hon. Michael G. Oxley 
(chairman) presiding.
    Members present: Representatives Oxley, Tauzin, Gillmor, 
Cox, Shimkus, Towns, Barrett, Luther, Markey and Hall.
    Staff present: Brian McCullough, majority professional 
staff member; David Cavicke, majority counsel; Robert Simison, 
legislative clerk; and Consuela Washington, minority counsel.
    Mr. Oxley. The subcommittee will come to order.
    We are here today to examine the Public Utilities Holding 
Company Act of 1935, better known as PUHCA. You can say that 
this hearing concludes electricity week in Rayburn room 2123. I 
suspect many people out in the audience have been here for so 
long this week that we should have been considerate enough to 
put sleeping bags and a coffee pot here in the committee room.
    The Finance and Hazardous Materials Subcommittee has a 
special interest in PUHCA because of the role of the SEC. 
Congress turned to SEC regulation in the 1930's in order to 
address shareholder and ratepayer abuses stemming from the 
perplexing structure of utility holding companies. But with the 
exception of PUHCA and maybe Glass-Steagall, we are living in 
the 1990's and not the 1930's. Investors are adequately 
protected by other measures. The responsibility for regulating 
utilities has long since been capably assumed by the State 
commissions and FERC. Increasingly, we are finding that 
consumers are better served by a competitive market than a 
regulatory regime. It is in this context that people are asking 
whether PUHCA is an asset or merely antiquated.
    What particularly strikes me is that the SEC itself has in 
essence said that it wants out of this business. It is not 
often that you hear that from a regulatory agency. But in staff 
reports and today's testimony, the Commission has pointed out 
PUHCA's redundancy in real-world costs. I understand that some 
of our witnesses will state that PUHCA is standing in the way 
of a more robust national marketplace by hemming in not just a 
handful of registered holding companies, but discouraging many 
other utilities from moving into new markets.
    Other witnesses will argue that PUHCA should be repealed 
only in conjunction with overall industry restructuring. One 
issue of particular interest to me is what degree of access to 
utility books and records is appropriate in the event of PUHCA 
repeal. Private companies are not public libraries, and the 
protection of sensitive internal information is a legitimate 
concern.
    It is no secret that PUHCA repeal is being discussed in the 
context of larger issues. One valuable aspect of today's 
subcommittee hearing is we will have a chance to learn if on 
its merits as a securities statute PUHCA is still of any use, 
or, worse, doing harm.
    That ends the Chair's opening remarks, and I will turn to 
the ranking member Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    I have long maintained that electricity restructuring does 
not have to be done all at once or as a complete package. In 
fact, the Federal Energy Regulatory Commission took 3 years 
plus to write the rule to implement the last energy policy 
changes that were adopted by this committee. This suggests to 
me that where restructuring issues are involved, that they are 
very complex and require detailed scrutiny.
    There are areas, however, which I believe the Federal 
Government can and should act on to facilitate utility 
restructuring. Those dozen or so utilities that are still 
subjected to PUHCA are at a clear disadvantage in comparison to 
their gas and electric utility competitors who are exempt from 
the act's control. The SEC has signaled that they believe that 
the time is long past for needed regulation by the Commission. 
Unfortunately, there are some voices who believe that no 
Federal forum should occur until we have a comprehensive 
restructuring bill.
    I would hope that good policy would not simply be held 
hostage politically for the sake of a larger bill. If PUHCA 
repeal is the right action, then we should move forward without 
any preconditions or any hesitation.
    It is my hope, Mr. Chairman, that regardless of the 
Commerce Committee's final determination on an electricity 
restructuring bill, that we will move to repeal the Public 
Utility Holding Act in the 106th Congress, and I anxiously wait 
to hear from the witnesses on this very, very important issue.
    Thank you very much, Mr. Chairman, and I yield back the 
balance of my time.
    Mr. Oxley. The gentleman yields back. The chairman 
recognizes the vice chairman of the committee Mr. Tauzin.
    Mr. Tauzin. Thank you, Mr. Chairman.
    This is an issue that is relatively important to me. We are 
here to address the simple question of whether or not it is now 
prudent to repeal the Public Utility Holding Company Act of 
1935, whether it is time to enter the new millennium with a 
modern mentality.
    Mr. Chairman, I believe we should repeal PUHCA as soon as 
possible. I asked my staff to look at the first couple of bills 
that I filed in Congress, I got here in 1980, and in 1982 as 
one of the first bills that I filed, House bill 6581, a bill 
sponsored by myself and John Breaux of Louisiana, who is now in 
the U.S. Senate. It is a simple bill, a stand-alone bill to 
repeal PUHCA. 1982. Essentially we filed the same bill this 
year in 1999, House bill 2363, again to repeal PUHCA.
    To repeal anything around here is not an easy task. I had a 
great friend of mine from the Southwest Energy Council, which I 
chaired, a five-State energy compact which I chaired as a State 
legislator in Louisiana. I was part of that energy compact in 
order to fight the regulatory laws here in Washington that were 
impeding the orderly development of energy markets in the part 
of the world that produces most of the energy for America.
    And that young man had moved with me. He had gotten a job 
at FERC, and he came by to visit me in the first couple of 
weeks of my attendance here in Congress, and I remember him 
sitting down and telling me about all of his new 
responsibilities for the Federal Energy Regulatory Commission. 
And I smiled and I said, do you know that I got elected on a 
pledge to deregulate energy? I have a promise to see what I can 
do about abolishing FERC, and that means your job. And he 
smiled back and he said, Billy, I am now on the B team. I said, 
B team, what do you mean? He said, I will be here when you 
come, and I will be here when you leave. He is still here, and 
so is PUHCA, and so is FERC.
    In 1935, you can make a case that PUHCA was important 
because it was enacted to address rising abuses out of pyramid 
corporate structures. In the 1930's, that was a real problem. 
At that time applicable State and Federal laws in place were 
inadequate to protect consumers and investors from arbitrary 
rate hikes. But since 1935, these laws have become much more 
comprehensive and sensitive to present marketing conditions. 
The ability of State commissions to regulate holding company 
systems together with the emergence of regulation under the 
Federal Power Act of 1935, the Natural Gas Act of 1938 have 
eliminated regulatory gaps that existed in 1935. The expanded 
ability of State commissioners and the FERC to regulate 
interaffiliate transactions has now, frankly, rendered PUHCA 
unnecessary.
    Despite these developments, PUHCA remains on the books. 
PUHCA says to some energy companies, you can't do things that 
other competing energy companies can do. It says to some energy 
companies, you can't invest in efficiencies for your consumers 
that its competitors can invest in. And as we move toward 
deregulation of the energy markets, first as we have on the 
wholesale level and now as Mr. Barton is going to attempt to 
mark up a bill to deregulate on the retail level, what sense 
does it make to have my energy company inhibited in making 
efficiency investments that somebody else's energy company that 
will compete with it is not restricted in? What sense indeed in 
a free market?
    Now, I realize today that, Mr. Chairman, you have got on 
the panel later on, representatives of the New Orleans City 
Council, which in 1982 opposed John Breaux and my efforts to 
appeal PUHCA, and in 1999 are still opposing our efforts. Some 
things never change. They will not convince me, and I will not 
convince them, and the fact that they are here still opposing 
it is an indication of how these old laws and structures remain 
on the books.
    But let me say something in closing, Mr. Chairman. The 
reason I came to Congress as a representative of the great 
State of Louisiana, having served 9 years in the State 
legislature, fighting and battling the mandates and regulations 
that came out of this committee, this Commerce Committee, the 
reason I ran for Congress was to get on this Commerce Committee 
and do what I can to tear down that awful fabric and awful 
scheme of regulations which inhibited my people, the people of 
Louisiana, from producing freely in a marketplace the energy 
that this country needed.
    And we are still about that today. That task is not 
complete. It will be a little more complete, I hope, after this 
hearing and after Mr. Barton begins marking up his bill, 
because the Barton bill contains the PUHCA repeal that is 
contained in the bill that I filed in 1982 and the one that I 
filed this year.
    Mr. Chairman, I remember coming to visit with the Reagan 
White House, pleading with them to do something about taxation 
of royalty owners in Louisiana. We were taxed at 90 percent; 90 
percent of our income was taken by the Federal Government. That 
is how awful the regulations and taxes and inhibitions were on 
those of us who wanted to produce energy for America.We have 
made a lot of gains since those days. This is one that we need 
to win, too.
    I want to close by saying that I can't stay. I have to be 
at a whip meeting. I am part of whip organization to try to get 
our legislation moving, and then I move over to the 
Presidential round table where Majority Leader Dick Armey and I 
will debate a much more important repeal than even PUHCA. We 
are going to debate repeal of the IRS Code and the IRS itself. 
I leave this issue in your good hands, Mr. Chairman.
    Mr. Oxley. Mr. Luther.
    Mr. Luther. Thank you, Mr. Chairman. I don't have an 
opening statement.
    Mr. Oxley. The gentleman from California Mr. Cox.
    Mr. Cox. I just want to thank the chairman for focusing 
attention on this issue. I certainly share the interest that my 
colleague Mr. Tauzin just expressed in this.
    It goes without saying that a hell of a lot has happened 
since 1935, so we are not being precipitous in focusing our 
attention on this. The Federal Power Act, the National Gas Act, 
FERC and everything else that the States are doing has eclipsed 
the state-of-the-art from 1935, and this is a very, very timely 
issue to take up at this point, and so I congratulate the 
chairman.
    Mr. Oxley. I thank the gentleman.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Paul Gillmor, a Representative in Congress 
                         from the State of Ohio
    Mr. Chairman, I want to thank you for calling this second hearing 
on the subject of the Public Utility Holding Company Act (PUHCA). As 
you are aware, this Federal law has tremendous reach in our state of 
Ohio and I am glad we are taking to examine its implications.
    Since our hearing largely expands upon the work this panel began a 
few weeks ago, I will not spend a great deal of time re-outlining my 
position on this issue. Rather, I want to take a brief moment to 
recognize and welcome a fellow ``Buckeye'' to our hearing.
    Bill Lhota has been in the American Electric Power Company (AEP) 
system for almost 35 years, serving now as Executive Vice President. 
His current responsibilities include energy transmission and 
distribution services, as well as pricing functions and corporate, 
consumer, and environmental affairs for AEP's seven state territory. 
His counsel has been terribly helpful to me over the years and his 
insight on PUHCA in a deregulating electric market will be most 
insightful. I look forward to hearing his testimony.
    Again, Mr. Chairman, thank you for this time and I look forward to 
the panels we will hear from today.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    I commend you, Mr. Chairman, for holding this hearing today on 
PUHCA. This is a statute that crosses Subcommittee lines and I 
appreciate you holding this hearing in a timely fashion. The Securities 
and Exchange Commission administers the Act and therefore maintains a 
role in the legislative process regarding this aspect of electricity 
deregulation. This is a statute in the securities laws, and therefore 
an appropriate hearing for the Subcommittee on Finance and Hazardous 
Materials.
    You have all heard me say I want competition for retail electricity 
consumers. Given that competition is now the engine driving market 
developments in the utility industry, PUHCA reform is widely supported. 
Combined with greater discipline imposed on holding companies by the 
markets, concerns about abusive practices by the holding companies have 
changed.
    The SEC conducted a study of the Act and issued a report in 1996 on 
its findings. The Commission's recommendation then, as is still the 
case, is for conditional repeal. However, I believe that PUHCA repeal 
should be linked to competition. Competition is a far better protector 
of consumers than regulation. In 24 States, with 60% of the population, 
the decision has been made to move from monopoly control of retail 
rates, to competitive electricity sales. But in a case where there is 
no competition (which is the case for roughly 40% of the nation's 
ratepayers) some regulation is needed during the transition to a 
national marketplace for electricity.
    Thus, I continue to believe that repeal of PUHCA, absent 
comprehensive deregulation legislation, is a mistake. Market power 
issues cannot be solved by PUHCA repeal without companion legislation 
that addresses the much larger competitive issues.
    PUHCA repeal is a provision that has always been closely linked to 
comprehensive electricity deregulation and is therefore a timely 
hearing. The Subcommittee on Energy and Power is scheduled to markup 
comprehensive electricity deregulation legislation this month.
    Thank you once again, Mr. Chairman. I look forward to hearing the 
testimony of our witnesses today.

    Mr. Oxley. The Chair now turns to the first panel. Let me 
introduce both of them. Mr. Douglas W. Smith, general counsel 
for FERC, and Isaac C. Hunt of the SEC. Welcome. Let's begin 
with Mr. Smith.

STATEMENTS OF DOUGLAS W. SMITH, GENERAL COUNSEL, FEDERAL ENERGY 
 REGULATORY COMMISSION; AND ISAAC C. HUNT, JR., COMMISSIONER, 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Smith. Mr. Chairman and members of the subcommittee, 
good morning. My name is Douglas Smith, and I am the general 
counsel of the Federal Energy Regulatory Commission. I am here 
today as a Commission staff witness and do not speak for the 
Commission or for individual members of the Commission.
    I did want to note that Chairman Hoecker, the Commission's 
Chairman, regrets that he was not able to participate in this 
hearing personally. He was planning to participate before the 
hearing was rescheduled.
    Mr. Oxley. We were victims of the hurricane, and we 
appreciate your being here.
    Mr. Smith. My testimony will address the Public Utility 
Holding Company Act of 1935 and other related issues arising in 
the debate relating to the restructuring of the electric 
industry.
    Competition is growing in bulk power markets, spurred by 
reforms of the Energy Policy Act of 1992 and the Commission's 
efforts to remove barriers to competition and to let markets--
instead of regulators--determine the price of wholesale power. 
Competition in wholesale markets ultimately reduces prices for 
end users. Competition can still be impaired, however, by 
cross-subsidization and the exercise of market power.
    As Congress considers reform or repeal of PUHCA, it is 
critical that regulators have an updated and effective set of 
tools to combat cross-subsidization and market power if the 
public is to benefit from competition in the generation sector. 
Thus, repeal of PUHCA is appropriate only if FERC and State 
regulators are given adequate authority to examine the books 
and records of companies affiliated or associated with public 
utilities, in order to prevent cross-subsidization of 
entrepreneurial ventures by captive utility customers. Such 
cross-subsidization occurs if utilities with captive customers 
pay an excessive price for goods and services purchased from 
affiliated or associated companies, or if they charge an 
inadequate price for goods and services provided to those 
companies.
    If PUHCA is not repealed in its entirety, Congress should 
address the problem created by the court's decision in the Ohio 
Power case. Under that decision, FERC cannot examine the 
reasonableness or prudence of costs incurred by a public 
utility under a contract for nonpower goods or services with an 
affiliated company belonging to the same registered holding 
company. The result of this decision is that utility customers 
served by registered holding companies have less protection 
than customers served by nonregistered systems.
    The impact of PUHCA reform proposals on competition and 
consumer interests should be evaluated in the context of 
accompanying proposals for Federal Power Act reforms. Review of 
public utility mergers under section 203 of the Federal Power 
Act remains essential to protect consumers against market power 
and other possible adverse effects of mergers, and the 
authority to conduct these reviews should not be compromised. 
The Federal Power Act should be amended to clarify the 
Commission's jurisdiction to review mergers of public utility 
holding companies. Moreover, to guard against undue 
concentration in generation markets that could undermine 
competition, section 203 review should be extended to 
transactions involving only generation facilities.
    Ensuring fair access to essential transmission services is 
also critical to support competitive power markets. In this 
regard the Federal Power Act should be reformed to extend the 
Commission's open access transmission authority to all 
transmitting utilities in the lower 48 States, to reinforce the 
Commission's authority to promote regional management of the 
transmission grid through regional transmission organizations, 
and to establish a fair and effective program of mandatory 
reliability standards.
    Several pending legislative proposals would also enhance 
Commission authority to remedy market power outside the context 
of a merger or rate review. These proposals would, for 
instance, permit the Commission, upon request, to assist a 
State commission that identifies market power problems in its 
retail market, but lacks adequate authority to address the 
problem. As the Commission seeks to move toward light-handed 
regulation of competitive markets, its ability to monitor the 
market and to identify and effectively remedy exercises of 
residual market power becomes more important.
    Thank you again for the opportunity to offer my views this 
morning. I would be pleased to answer any questions you may 
have.
    [The prepared statement of Douglas W. Smith follows:]
Prepared Statement of Douglas W. Smith, General Counsel, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: Good morning. My name 
is Douglas Smith, and I am the General Counsel of the Federal Energy 
Regulatory Commission (Commission or FERC). I appear as a Commission 
staff witness, and do not speak on behalf of the Commission or any 
Commissioner. Thank you for the opportunity to appear before you today. 
My testimony will address the Public Utility Holding Company Act of 
1935 (PUHCA) and other related issues in the restructuring of the 
electric utility industry.
    My testimony makes three key points:

(1) Repeal of PUHCA is appropriate only if FERC and the states are 
        given adequate authority to examine the books and records of 
        companies affiliated or associated with public utilities in 
        order to prevent subsidization of entrepreneurial ventures by 
        captive utility customers.
(2) As the industry moves toward competitive power markets, regulators 
        must have effective tools for addressing market power problems.
    (a) Federal Power Act (FPA) review of public utility mergers 
            remains essential to protect consumers against market power 
            and other possible adverse effects of mergers.
    (b) FPA merger review should be extended to cover generation-only 
            mergers and utility holding company mergers.
    (c) Regulators need effective tools to protect wholesale and retail 
            customers from the exercise of market power that does not 
            arise from a merger.
(3) In order to address transmission market power and promote regional 
        market efficiencies, Congress also should reinforce the 
        Commission's authority to promote establishment of, and 
        participation in, regional transmission organizations.
In sum, it is critical that regulators have an updated and effective 
set of tools to guard against cross-subsidization and the exercise of 
market power to ensure that the public benefits from competition in the 
generation sector.
                            i. introduction
    Let me begin by explaining the Commission's role in regulating the 
utility industry. In enacting Part II of the FPA in 1935, one of the 
primary Congressional goals was to protect electric ratepayers from 
abuses of market power, such as excessive or discriminatory rates 
imposed by utilities with a monopoly or other forms of market power. In 
furtherance of this goal, Congress directed the Commission to oversee 
sales for resale and transmission service provided by public utilities 
in interstate commerce. Under sections 205 and 206, the Commission must 
ensure that the rates, terms and conditions of these services are just, 
reasonable, and not unduly discriminatory or preferential. Under 
section 203, the Commission must review proposed mergers, acquisitions 
and dispositions of jurisdictional facilities by public utilities, and 
must approve such transactions if they are consistent with the public 
interest. The Commission's regulation under these sections applies only 
to ``public utilities,'' which mainly include investor-owned utilities 
and exclude the federally-owned utilities, municipal utilities, and 
most rural electric cooperatives.
    The traditional regulatory approach has been to regard electricity 
generation as a natural monopoly, and to address market power and 
protect ratepayer interests primarily by relying on cost-of-service 
rate regulation. In the 1980s and early 1990s, however, industry 
developments indicated that the interests of ratepayers could be better 
protected by competition in generation markets than by cost-based 
regulation for wholesale sales. The benefits of competition in place of 
traditional regulation were increasingly evident in other industries, 
such as trucking, railroads, telecommunications and natural gas. Also, 
prompted by a range of economic, legislative and technological factors, 
some competition among power generators already had begun developing in 
the electric industry. One key factor was the Public Utility Regulatory 
Policies Act of 1978 (PURPA), which opened the door for non-utility 
generators. In the Energy Policy Act of 1992, Congress strongly 
endorsed competition in wholesale power markets with amendments to the 
FPA and PUHCA.
    The Commission has pursued this pro-competition focus by ordering 
open access to transmission facilities in Order No. 888, and in its 
merger and wholesale rate policies. The Commission's primary focus 
shifted from cost-based ratemaking for wholesale sales to creating the 
conditions for robust competition in the bulk power market. This 
transition has required the Commission to pay increasing attention to 
issues of market structure, market power, and market monitoring.
    The growth of competition in the electricity industry has triggered 
debate on a wide range of possible changes in federal law. Chairman 
Hoecker and I have testified on some of these changes in other recent 
Congressional hearings. For example, we believe that Congress should 
adopt legislation bringing all transmission facilities in the lower 48 
states within the Commission's open access transmission authority, and 
establishing a fair and effective program to protect bulk power 
reliability. Today, however, my testimony will focus on three issues--
PUHCA reform; merger review and market power; and regional transmission 
organizations.
                 ii. public utility holding company act
    When PUHCA was enacted in 1935, the utility industry was dominated 
by a small number of holding companies. For various reasons, these 
companies and their utility subsidiaries were often able to evade 
effective regulation and, as a result, charge excessive rates for 
electric energy. PUHCA was intended primarily to restrict the abusive 
practices of these holding companies and to allow effective regulation 
of transactions between or among holding company subsidiaries. PUHCA 
was enacted simultaneously with Part II of the FPA, which provided the 
framework for Federal regulation of public utilities, as described 
above.
    As a general matter, the Securities and Exchange Commission (SEC) 
regulates registered utility holding companies under PUHCA while, under 
the FPA, 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 matters, but from the 
perspective of different members of the holding company system and for 
different purposes. 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.
    With increasing competition in power markets, however, PUHCA may no 
longer advance consumers' interests. For example, 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 in turn 
enhances market power and diminishes competition.
    In the Energy Policy Act of 1992, Congress initially addressed the 
tension between PUHCA and competition. Congress allowed an exemption 
from PUHCA regulation for companies engaged exclusively in the business 
of selling electric energy at wholesale. By using this exemption, many 
new companies have begun competing in wholesale markets across the 
country. These new exempt wholesale generators (or EWGs) cannot compete 
for retail sales, however, even where States have allowed retail 
competition.
    Many argue now that PUHCA should be repealed entirely. They assert 
that increasing competition in the electric industry, and improvements 
in state and federal rate regulation since the 1930s, make PUHCA an 
anachronism or, worse, an impediment to further competition. PUHCA's 
encouragement of regional concentration of generation ownership, for 
example, is undesirable in competitive markets. Thus, it is an 
appropriate time to reform or repeal PUHCA.
    However, any legislation to reform or repeal PUHCA must ensure that 
FERC and the States have adequate authority to examine the books and 
records of all companies in a holding company system that are relevant 
to costs incurred by an affiliated or associated public utility. This 
type of authority will provide an effective tool to protect against 
affiliate abuse and ensure that captive utility consumers do not cross-
subsidize entrepreneurial ventures. Absent this type of authority, 
utilities may be able to subsidize affiliated companies at the expense 
of captive customers by, for example, paying an excessive price for 
goods and services purchased from affiliated companies or charging an 
inadequate price for goods and services provided to affiliated 
companies. Cost allocation arrangements among such companies can also 
result in an improper shift of costs to captive customers.
    If PUHCA is not repealed, Congress should at least address the Ohio 
Power problem. In a 1992 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 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 non-affiliate.
    The Ohio Power decision has left a significant 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 non-registered systems. If the contract approval 
provisions of PUHCA are retained, 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.
                  iii. merger review and market power
    As noted above, the Commission reviews proposed mergers, 
acquisitions and dispositions of jurisdictional facilities by public 
utilities, and must approve such transactions if they are consistent 
with the public interest. In a policy statement adopted in 1996, the 
Commission stated that, in assessing whether a proposed merger was in 
the public interest, it would consider the effects of the merger on 
competition, on rates and on regulation.
    In most cases decided since then, the primary issue has been the 
effect on competition. Consistent with its overarching goal of 
promoting competition in wholesale power markets, the Commission seeks 
to ensure that mergers will not harm competition. If a merger is likely 
to harm competition, mitigation of this potential harm is required in 
order to ensure that the merger is consistent with the public interest.
    Under this authority, the Commission has required merger applicants 
to prevent competitive harm by providing others with access to their 
transmission facilities, thus ensuring that the merger did not reduce 
the competitive options available to wholesale buyers and sellers. 
Similarly, the Commission has accepted commitments by applicants to 
turn over control of their transmission facilities to independent 
system operators (ISOs), as a way of ensuring the merger did not cause 
competitive harm. The Commission also has required rate protection for 
captive customers. These and other conditions and commitments imposed 
or accepted by the Commission have provided substantial benefits to the 
public and, thus, ensured that the mergers were consistent with the 
public interest.
    I would also emphasize that, in the past few years, the Commission 
has improved the timeliness of its merger decisions significantly. In 
its 1996 policy statement on mergers, the Commission made a commitment 
to act on mergers within 90 days of the end of a 60-day public comment 
period (a total of 150 days). Since making that commitment, the 
Commission has received 30 merger applications and acted on 23 of them, 
the other seven having been filed only recently. The Commission set 
only three of these 23 cases for hearing. The Commission has met its 
target of acting within 150 days consistently. In fact, in a number of 
cases, the Commission has acted much more quickly, within 93-117 days. 
The Commission also has sought to authorize other corporate 
transactions as quickly as reasonably possible, often in as few as 35 
days.
    A few have argued that the Commission should no longer review 
mergers. They posit that the Commission's review is redundant of the 
efforts of the U.S. Department of Justice or the Federal Trade 
Commission. I disagree.
    First, the Commission's day-to-day involvement with the electric 
industry gives it a valuable and detailed understanding of electricity 
markets as they are shaped by the transmission grid. This expertise can 
provide critical insights in assessing a merger's competitive effects.
    Second, the Commission's duty to consider the public interest 
encompasses not only competitive effects but also other effects, such 
as possible increases in cost-based rates for transmission service. 
Since certain aspects of the utility industry are not subject to 
effective competition, the scope of inquiry conducted by the Commission 
helps to protect consumers from effects not considered by the antitrust 
agencies.
    Third, the Commission's procedures permit public participation in a 
timely process to determine the public interest. This public review 
process remains important in the context of today's electric industry, 
given the vital importance of the electric industry to American 
citizens and the national economy.
    With the possible repeal of PUHCA's corporate structure 
restrictions, it is essential that the Commission's merger review under 
the FPA remains intact. The Commission's merger review is a key 
component of market oversight, especially in a competitive era. 
Congress should act to close two gaps in the Commission's jurisdiction 
over mergers, especially if the corporate oversight restrictions of 
PUHCA are eliminated.
    The first such gap is that the Commission has no direct 
jurisdiction over transfers of generation facilities. It can review 
transactions involving a public utility only when they involve other 
facilities that are jurisdictional (such as transmission facilities or 
contracts for wholesale sales). Thus, although concentration of 
generation assets may directly affect competition in wholesale markets, 
transactions involving only generation assets may not be subject to FPA 
review.
    Second, the Commission lacks direct jurisdiction over mergers of 
public utility holding companies. While the Commission has considered 
such mergers to involve jurisdictional indirect mergers of public 
utility subsidiaries of the holding companies, or changes in control 
over the jurisdictional facilities of the public utility subsidiaries, 
the FPA is not explicit on this point.
    These jurisdictional gaps could be usefully addressed in the course 
of legislative reform. Appropriate legislative language can be found in 
H.R. 2944 (Sec. 401), offered by Representative Barton, H.R. 1828 
(Sec. 502), offered by Representatives Bliley and Dingell on behalf of 
the Administration, and in H.R. 2050 (Sec. 110), offered by 
Representatives Largent and Markey.
    Several pending legislative proposals would enhance the 
Commission's authority to address market power outside the context of 
mergers. For example, the Administration's proposed bill, H.R. 1828, 
would allow the Commission to address market power in retail markets, 
if asked to do so by a state lacking adequate authority to address the 
problem. It would also give the Commission explicit authority to 
address market power in wholesale markets by requiring a public utility 
to file and implement a market power mitigation plan. H.R. 2050, 
sponsored by Congressmen Largent and Markey, also contains provisions 
that would allow mitigation of market power, to the benefit of 
competition and consumers. Such provisions are particularly desirable 
in circumstances where a State lacks adequate authority to address 
market power issues and seeks FERC's assistance. As the Commission 
moves toward light-handed regulation, its ability to monitor the market 
and to identify and address exercises of residual market power becomes 
more important.
                  iv. regionalization of transmission
    For many decades, most public utility mergers have involved 
utilities that were adjacent or near to each other. In large part, this 
stems from PUHCA's integration requirement. As noted above, this 
requirement is hard to reconcile with expanding competition in 
generation markets. However, regional aggregation of transmission 
facilities can still provide substantial benefits. As Congress 
considers repealing PUHCA, Congress should also consider the need for 
new tools for promoting regional operation of transmission facilities.
    On this point, the Commission currently is exploring (through a 
proposed rulemaking issued in May of this year) how it might promote 
the formation of regional transmission organizations (RTOs) such as 
ISOs and independent companies that own and operate transmission 
facilities (transcos). An RTO that covers an appropriately configured 
region, has adequate operational control over the transmission grid, 
and is independent of the financial interests of power market 
participants, can address obstacles to competition by reducing rate 
pancaking, eliminating opportunities for bias in transmission 
operations, and allowing for more efficient and reliable operation and 
planning of the transmission grid.
    Any legislation addressing the restructuring of the electric 
utility industry should reinforce the Commission's authority to promote 
regional management of the transmission grid through RTOs. RTOs should 
be the platform for bulk power competition and enhanced reliability, 
which are valuable consumer protections. Without reinforcement of our 
authority by Congress, efforts to develop RTOs may take longer than 
necessary and may not include transmission owners that are not public 
utilities, and therefore ultimately may fail to provide the full 
competitive opportunities achievable through regionalization of grid 
management. Authority to effectively promote RTO development is 
necessary to ensure that customers have access to as many competitive 
choices as the market can provide.
                             v. conclusion
    As we seek to rely more heavily on competitive markets as opposed 
to traditional price regulation to protect the interests of wholesale 
electricity customers, regulators need appropriate tools to address 
cross-subsidization and market power problems that may threaten 
competition.
    PUHCA reform is appropriately considered in the debate on 
comprehensive, pro-competitive electricity legislation. If Congress 
repeals PUHCA, Congress should simultaneously ensure that FERC and the 
states have adequate authority to examine the books and records of all 
utility affiliates and associates in order to prevent cross-
subsidization by captive utility customers. If Congress does not repeal 
PUHCA in its entirety, the Ohio Power problem should be addressed, at a 
minimum, to ensure that FERC has adequate authority to review affiliate 
transactions to ensure just and reasonable rates and prevent cross-
subsidization.
    As the Commission and the Congress both seek to promote competition 
in bulk power markets, it is essential to effectively address market 
power. With respect to ensuring fair access to essential transmission 
services, reforms to the Federal statutory scheme are appropriate to 
extend the Commission's open access transmission authority to all 
transmitting utilities in the lower 48 States, reinforce the 
Commission's authority to promote regional management of the 
transmission grid through RTOs, and establish a fair and effective 
program of mandatory reliability standards. Moreover, it is critical to 
retain and update the FPA requirement for public interest review of 
mergers. Finally, providing ample regulatory authority to address 
market power problems in non-merger contexts is appropriate to foster 
competitive power markets.
    Thank you again for the opportunity to offer my views here this 
morning. I would be pleased to answer any questions you may have.

    Mr. Oxley. Thank you, Mr. Smith.
    Mr. Hunt, welcome back to the committee.

                 STATEMENT OF ISAAC C. HUNT, JR.

    Mr. Hunt. Thank you, Mr. Chairman, members of the 
subcommittee. I am Commissioner Isaac C. Hunt, Jr., 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 this century, the electric and 
gas utility industries had developed serious problems through 
the misuse of the holding company structure. The 1935 act was 
passed by Congress to address these problems. Reorganization 
and simplification of existing public utility holding companies 
in order to eliminate those abuses was a major part of the 
SEC's work in the years following the passage of the 1935 act.
    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 other State or 
Federal regulation or otherwise were no longer necessary to 
prevent the recurrence of the abuses that led to its enactment. 
The SEC 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, institutional 
investors, such as pension funds and insurance companies, had 
become more sophisticated and demanded more detailed 
information from all issuers of securities than was previously 
available. Changes in the accounting profession and the 
investment banking industry also provided investors and 
consumers with a range of protections unforeseen in 1935. 
Therefore, the SEC unanimously recommended that Congress repeal 
the statute.
    Because the potential for abuse through the use of 
multistate holding company structures, and related concerns 
about consumer protection, continued to exist, and because of a 
lack of consensus for change, repeal legislation was not 
enacted in the early 1980's. Since that time, however, the SEC 
has continued its efforts to administer the 1935 act flexibly, 
to accommodate developments in the industry while adhering to 
the basic purpose of the statute. In addition, Congress has 
created a number of statutory exceptions to the regulatory 
framework of the 1935 act.
    In the summer of 1994, in light of regulatory and other 
changes taking place in the utility industry, 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 regulatory burdens. The preferred 
option is repeal of the 1935 act, accompanied by the creation 
of additional authority at the State and Federal level to 
permit the continued protection of consumers. The Federal 
Energy Regulatory Commission should have the authority to 
exercise jurisdiction over transactions among holding company 
affiliates. The FERC and State utility commissions should be 
able to review these transactions by having access to books and 
records. This course of action will achieve the economic 
benefits of unconditional repeal and also protect consumers.
    The SEC is aware that proposals of comprehensive reform of 
energy legislation are under consideration by Congress. Repeal 
of the 1935 act could also be considered as part of this 
overall reform. The SEC continues to support a comprehensive 
approach to reform of the 1935 act.
    The SEC has implemented many of the numerous administrative 
initiatives that were recommended in the report to streamline 
regulation. Despite the effects of these initiatives, 
developments in the utility industry are resulting in increased 
activity under the 1935 act, especially in the areas of mergers 
and acquisitions, diversification and affiliate transactions. 
These developments include the accelerating pace of competition 
initiatives at the State level, FERC's leadership in addressing 
open transmission and related structural issues, and the 
increasing internationalization of the utility industry.
    These developments raise additional challenges in applying 
the act to an industry that bears little resemblance to the 
industry which existed in 1935. Moreover, during 1998, mergers 
resulted in the formation of three new registered holding 
companies. The SEC expects that several holding companies will 
be required to register under the act in the near future. 
Hence, continuation of the 1935 act in its present form will 
require additional resources.
    The options of conditional repeal or an expansion of the 
SEC's exemptive of authority also raise the issue of resources. 
Repeal of the 1935 act would not achieve significant cost 
savings for the Federal Government, particularly if some of the 
responsibilities now handled by the SEC were carried out by the 
FERC. Expanded exemptive authority, on the other hand, could 
require greater resources, in view of the need to evaluate and 
implement broad requests for exemptive relief. The SEC 
respectfully defers to the judgment of Congress as to whether 
the public interest is better served by separate independent 
repeal of the 1935 act or repeal as part of a larger 
legislative initiative.
    The SEC continues to take 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 United States securities markets. By supporting 
the 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.
    And of course, Mr. Chairman, I would be pleased to answer 
your and the committee's questions.
    [The statement of Isaac C. Hunt, Jr. follows:]
Prepared Statement of Isaac C. Hunt, Jr., Commissioner, U.S. Securities 
                        and Exchange Commission
    Chairman Oxley, Ranking Member Towns, 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''). The 
SEC continues to support repeal of the Public Utility Holding Company 
Act of 1935 (``1935 Act''). Repeal should be done in a manner that 
eliminates duplicative regulation while also preserving important 
protections for customers of utility companies in multistate holding 
company systems.
                            i. introduction
    The electric and gas utility industry had developed serious 
problems in the first quarter of the century through the misuse of the 
holding company structure.1 The 1935 Act was enacted to 
address these problems. In the years following passage of the 1935 Act, 
the SEC worked to reorganize and simplify existing public utility 
holding companies in order to eliminate abuses.
---------------------------------------------------------------------------
    \1\ 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. 
See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
---------------------------------------------------------------------------
    In the early 1980's, the SEC unanimously recommended that Congress 
repeal the statute.2 The SEC concluded that the 1935 Act had 
accomplished its basic purpose and that its remaining provisions, to a 
large extent, either duplicated other state or federal regulation or 
otherwise were no longer necessary to prevent recurrence of the abuses 
that led to its enactment. 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. In addition, 
institutional investors such as pension funds and insurance companies 
had become more sophisticated and demanded more detailed information 
from all issuers of securities than previously available. Changes in 
the accounting profession and the investment banking industry also had 
provided investors and consumers with a range of protections unforeseen 
in 1935.
---------------------------------------------------------------------------
    \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 (1982) (statement of SEC).
---------------------------------------------------------------------------
    Because the potential for abuse through the use of multistate 
holding company structures, and related concerns about consumer 
protection, continued to exist, and because of a lack of consensus for 
change, repeal legislation was not enacted in the early 1980s. Since 
that time, however, the SEC has continued its efforts to administer the 
1935 Act flexibly to accommodate developments in the industry while 
adhering to the basic purpose of the statute. In addition, Congress has 
created a number of statutory exceptions to the regulatory framework of 
the 1935 Act.3
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    \3\ Most recently, Congress enacted the Telecommunications Act of 
1996. Pub. L. 104-104, 110 Stat. 56 (1996). The Telecommunications Act 
permits registered holding companies, without prior SEC approval under 
the 1935 Act, to acquire and retain interests in companies engaged in a 
broad range of telecommunications activities.
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                          ii. the sec's study
    In response to continuing changes in the utility industry in recent 
years, and the accelerated pace of those changes, Chairman Arthur 
Levitt directed the SEC's Division of Investment Management in 1994 to 
undertake a study, under the guidance of then-Commissioner Richard Y. 
Roberts, to examine the continued vitality of the 1935 Act. The impetus 
for the study was the changing landscape in public utility regulation 
noted above, and the SEC's increasing need to respond flexibly in the 
administration of the 1935 Act. Its purpose was to identify unnecessary 
and overlapping regulation, and, at the same time, identify those 
features of the statute that remain appropriate in the regulation of 
the contemporary electric and gas industries.4
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    \4\ The study focused primarily on registered holding company 
systems, of which there are currently nineteen. 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 more than 100, 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, 1998, the nineteen registered holding 
companies owned more than $170 billion of electric utility assets, 
approximately 25 percent of all assets owned by investor-owned electric 
utilities. Electric utilities owned by registered holding companies 
served 26.4 million customers, or approximately 22% of all electric 
customers in the United States.
---------------------------------------------------------------------------
    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, the Commission 
released a report (``Report'') of the staff's findings made during the 
study. Based on these findings, the SEC has recommended, and continues 
to recommend, that Congress repeal the 1935 Act. At the same time, 
however, the SEC also recommends 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.
    The SEC supports conditional repeal of the 1935 Act for several 
reasons. As the Report indicates, portions of the 1935 Act, such as 
those governing issuance of securities, acquisition of other utilities, 
and acquisition of nonutility businesses by registered holding 
companies, largely duplicate other existing regulation and controls 
imposed by the market. Nevertheless, there is a continuing need to 
ensure the protection of consumers.
    Electric and gas utilities have historically functioned as rate-
regulated monopolies. There is a continuing risk that these monopolies, 
if left unchecked, could charge higher rates and use the additional 
funds to subsidize affiliated non-utility businesses to boost their 
competitive positions in other markets (``cross-subsidization''). As 
long as electric and gas companies continue to function as monopolies, 
the need to protect against the cross-subsidization of nonutility 
businesses will remain. An effective way to guard against cross-
subsidization is audits of books and records and federal oversight of 
affiliate transactions.
    Utility rates are regulated by state authorities, and regulators 
vary in the degree of scrutiny they give these rates. A survey of state 
regulation, undertaken in conjunction with the study, revealed that the 
states may not have adequate authority to perform audit and review 
functions with respect to multistate holding companies. The provisions 
of the 1935 Act provide significant assistance to these states in their 
effort to protect utility consumers. Earlier efforts to repeal the 1935 
Act may have failed because they did not address this potential 
``regulatory gap'' in consumer protection.
                 iii. 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. 
Several bills have been introduced in both Houses of Congress during 
the current session that provide for the repeal of the 1935 Act, either 
as part of comprehensive energy restructuring or on a stand-alone 
basis. Five bills have been introduced in the House of Representatives 
(collectively, the ``House Bills''). H.R. 2363, introduced on June 25, 
1999 by Congressman Tauzin, Congressman Towns and several other members 
of Congress, would repeal the 1935 Act on a stand-alone basis. Four 
bills, including H.R. 1828, introduced by Chairman Bliley and 
Congressman Dingell (by request) on May 17, 1999, and H.R. 2050, 
introduced by Congressman Largent and Congressman Markey on June 8, 
1999, would repeal the 1935 Act as part of broader energy-related 
legislation.5 The House Bills share many common provisions. 
For example, the House Bills would provide the FERC with the right to 
examine books and records of registered holding companies and their 
affiliates that are relevant to costs incurred by associated utility 
companies, in order to protect ratepayers. The House Bills also would 
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 the effective 
discharge of the state commission's responsibilities in connection with 
a pending proceeding. Finally, the House Bills 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. The House Bills accomplish many of the goals of the 
conditional repeal advocated by the SEC.6
---------------------------------------------------------------------------
    \5\ H.R. 1587, introduced by Congressman Stearns on April 27, 1999, 
and H.R. 667, introduced by Congressman Burr on February 10, 1999, 
would also repeal the 1935 Act as part of comprehensive energy-related 
legislation.
    Three Senate bills (S.516, S.1284 and S.1047) would repeal the 1935 
as part of broader energy-related legislation. Another Senate bill, 
S.313, would repeal the 1935 Act on a stand-alone basis. The 1935 Act 
repeal provisions in the Senate bills are substantially the same as 
those in the House Bills other than for the provisions of H.R. 1587 and 
H.R. 2050 discussed below.
    \6\ There are some differences among the House Bills. For example, 
H.R. 1587, among other things, would exempt from its provisions holding 
companies currently exempt from registration under the 1935 Act. More 
significantly, H.R. 2050 provides that the 1935 Act would remain in 
effect for any holding company system that has a public utility 
subsidiary that provides retail electric or gas service in two or more 
states in which a state regulatory authority has not provided notice of 
retail competition pursuant to section 152 of the Public Utility 
Regulatory Policies Act of 1978 or which has not otherwise required 
distribution utilities to provide open access service. Repealing the 
1935 Act on a company-by-company basis, based on a determination of the 
status of state initiatives, presents complexities and uncertainties 
that require further analysis.
---------------------------------------------------------------------------
    As the SEC stated in testimony on similar bills introduced in the 
last Congress to repeal the 1935 Act, the House Bills do not give the 
FERC the authority it needs to oversee transactions among affiliates in 
holding company systems and, in this respect, do not reflect the SEC's 
preferred legislative option.7 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. However, 
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. As a result, the SEC continues to support a broader grant of 
authority to the FERC to oversee these transactions, including, if the 
FERC deems it appropriate, prior review and approval of affiliate 
transactions.
---------------------------------------------------------------------------
    \7\ See The Public Utility Holding Company Act of 1997: Hearings on 
S.621 Before the Senate Comm. on Banking, Housing, and Urban Affairs, 
105th Cong., 1st Sess. (1997) (testimony of Isaac C. Hunt, Jr., 
Commissioner, SEC); and Regarding Repeal of the Public Utility Holding 
Company Act of 1935: Hearings on S.621 Before the Senate Comm. on 
Energy and Natural Resources, 105th Cong., 1st Sess. (1997) (testimony 
of Barry Barbash, Director, Div. of Investment Management, SEC). See 
also Testimony of Commissioner Isaac C. Hunt, Jr., Commissioner, SEC, 
before the Subcomm. on Energy and Power, the House Comm. on Commerce, 
106th Cong., 2nd Sess. (1999).
---------------------------------------------------------------------------
    The SEC notes that the Report recommended a transition period of at 
least one year in duration. The National Association of Regulatory 
Utility Commissioners has since suggested that a longer period is 
necessary, in view of the fact that many state legislatures only meet 
biennially. The SEC would have no objection to a longer transition 
period.
                       iv. other recommendations
    The SEC Staff Report proposed two other legislative options: 
complete repeal of the 1935 Act and a grant of broader exemptive 
authority under the 1935 Act to the SEC.
    The SEC believes that complete repeal is premature, because the 
monopoly power of the industry has not yet been completely eradicated 
and current state regulation varies. Some commentators contend, 
however, that the states have the ability, if they choose to exercise 
it, to create regulatory structures that will protect utility consumers 
in holding company systems to the same extent as they are protected by 
the 1935 Act. Complete repeal, like conditional repeal, would require a 
reasonable transition period. As noted above, some states may need over 
a year to enact new legislation or to add resources to meet the 
additional regulatory burden that would accompany unconditional repeal 
of the 1935 Act.
    The third option is to provide the SEC with more authority to 
exempt holding company systems from the requirements of the 1935 
Act.8 An expansion of exemptive authority would not, of 
course, achieve the economic benefits of conditional or unconditional 
repeal of the 1935 Act, nor would it simplify the federal regulatory 
structure.9 Further, this option would continue to enmesh 
the SEC in difficult issues of energy policy.
---------------------------------------------------------------------------
    \8\ The SEC's current exemptive authority is considerably narrower 
than the exemptive authority under other federal 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 Advisers Act of 
1940, 15 U.S.C. Sec. 80b-6a; and section 36 of the Securities and 
Exchange Act of 1934, as recently amended by the National Securities 
Markets Improvement Act of 1996, 15 U.S.C. Sec. 78mm (same).
    \9\ In the past, the SEC has testified before Congress with respect 
to concerns that arose after the decision by the U.S. Court of Appeals 
for the District of Columbia Circuit in Ohio Power v. FERC, 954 F.2d 
779 (D.C. Cir.), cert. denied, 113 S.Ct. 483 (1992). See Registered 
Holding Company Transactions: Hearing on the 1992 Ohio Power Decision 
Before the Subcomm. on Energy and Power of the House of Representatives 
Comm. on Energy and Commerce, 103d Cong., 2d Sess. 35-48 (1994) 
(testimony of Richard Y. Roberts, Commissioner, SEC). The legislative 
repeal options discussed above would eliminate the problem of 
conflicting SEC and FERC decisions that were the subject of that 
decision.
---------------------------------------------------------------------------
    The SEC understands that many believe repeal of the 1935 Act should 
be accomplished as part of a more comprehensive package of energy 
reform legislation. The SEC respectfully defers to the judgment of 
Congress as to whether the public interest is better served by separate 
repeal of the 1935 Act or repeal as part of a larger legislative 
initiative.
                        v. administrative action
    The SEC continues to support a comprehensive approach to reform of 
the 1935 Act. The SEC has implemented many of the administrative 
initiatives that were recommended in the Report to streamline 
regulation.10 Despite the effects of these initiatives, 
developments in the utility industry are resulting in increased 
activity under the 1935 Act, especially in the area of mergers and 
acquisitions, diversification and affiliate transactions. These 
developments include the accelerating pace of initiatives at the state 
level to implement competition, the FERC's leadership in addressing 
open transmission and related structural issues, and the increasing 
internationalization of the utility industry. For example, two foreign 
utilities have recently announced plans to acquire U.S. utility 
systems. The acquisitions, if completed, would result in two foreign 
registered holding companies.
---------------------------------------------------------------------------
    \10\ 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. 26313 (June 20, 1995), 60 
FR 33642 (June 28, 1995) (proposing rule 58) and No. 26667 (Feb. 14, 
1997), 62 FR 7900 (Feb. 20, 1997) (adopting rule 58)). In addition, the 
Report recommended changes in administration of the Act that would 
permit a ``shelf'' approach for approval of financing transactions, 
relax constraints on utility acquisitions and streamline the approval 
process for such transactions. 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. Finally, 
the Report recommended that the Commission exercise more flexibility in 
granting exemptions from registration under section 3(a) of the Act, 
based on the facts and circumstances in each situation and, 
particularly, assurances from affected state commissions concerning 
effective state regulation. The Commission has issued three orders 
based on this approach. NIPSCO Industries, Inc., Holding Co. Act 
Release No. 26975 (February 10, 1999)(section 3(a)(1)); Houston 
Industries Incorporated, Holding Co. Act Release No. 26744 (July 24, 
1997)(section 3(a)(2)); and AES, Inc., Holding Co. Act Release No. 
27063 (Aug. 20, 1999), motion to reconsider pending, (section 3(a)(5)).
---------------------------------------------------------------------------
    These developments raise additional challenges in applying the Act 
to an industry that bears little resemblance to that which existed in 
1935. Moreover, during 1998, mergers resulted in the formation of three 
new registered holding companies. The SEC expects that several holding 
companies will be required to register under the Act in the near 
future. Hence, continuation of the 1935 Act in its present form will 
require additional resources.
    The options of conditional repeal or an expansion of the SEC's 
exemptive authority also raise the issue of resources. At present, 
sixteen full-time professional SEC employees are employed in the 
administration of the 1935 Act. Their work includes (1) analysis and 
disposition of various transactions for which the 1935 Act requires 
prior SEC authorization, (2) resolution of status issues under the 1935 
Act, (3) audits of holding company systems and related companies, and 
(4) drafting and implementation of rulemaking proposals to reflect 
changes in the utility industry and in financial regulation. Repeal of 
the 1935 Act would not achieve significant cost savings for the federal 
government, particularly if some of these responsibilities were carried 
out by the FERC. Expanded exemptive authority, on the other hand, could 
require greater resources, in view of the need to evaluate and 
implement broad requests for exemptive relief.
    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 United States 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.

    Mr. Oxley. Thank you, Mr. Hunt, both of you.
    Let me begin by asking Mr. Hunt, it has been stated many 
times that PUHCA is a barrier to entry for companies that would 
otherwise enter the electric business. If you were Exxon, would 
you consider entering the energy business as long as PUHCA is 
on the books?
    Mr. Hunt. As long as PUHCA were on the books, I would 
recognize that there might be serious constraints on the way I 
wanted to diversify if I entered that industry. I might choose 
to go into an industry regulated by one State regulatory agency 
rather than PUHCA, which arguably would have less restrictive 
burdens on it.
    Mr. Oxley. Your testimony states that the Division of 
Investment Management carefully considered issues relating to 
competition in the electric and gas industries. What are the 
benefits that increased competition in these industries have 
brought to investors, and can you compare the experience of the 
gas industry to the electric industry?
    Mr. Hunt. In terms of competition?
    Mr. Oxley. Yes.
    Mr. Hunt. In terms of competition, I think that the 
electric industry under PUHCA has probably had, I would think, 
more restrictions on it than has been the case in the gas 
industry.
    Some of the restrictions in PUHCA require companies that 
have merged to be in the same geographic area. That is defined 
in various strange ways in PUHCA.
    In the gas industry, being in the same areas sometimes 
means getting gas from the same source, but the utilities 
themselves can be in very diverse situations. We have had 
situations where a California gas utility acquired a North 
Carolina freestanding utility, gas, but they were considered to 
be in the same area because they got gas from the same source.
    So the statute does have some anomalies in it in terms of 
how we regulate the electric and the gas industry.
    Mr. Oxley. Let me ask Mr. Smith that basic question, the 
comparison between the gas industry and the electric industry 
in relation to competition and growth.
    Mr. Smith. From the Commission's perspective, the growth of 
competition in the interstate natural gas industry is, one 
might say, one generation ahead of where competition is in the 
electric industry. In gas markets, the decontrol of natural gas 
wellhead prices in the early 1990's was coupled with the 
Commission's actions in Orders 436 and 636 to move away from 
regulation of the commodity itself and to regulate as monopoly 
services the interstate transmission of natural gas. I think we 
are moving in that direction in the electric industry.
    The Commission's primary focus now is on encouraging 
competition among suppliers of electricity. One of the key 
elements of doing that is to regulate the essential 
transmission facilities so that sellers can deliver their 
electricity.
    We still regulate some wholesale power sales under cost-
based rates, but a lot of wholesale power sales now are done 
under market-based rates. We are regulating, in terms of actual 
cost of service regulation, fewer and fewer of the wholesale 
sales in the electric industry. In parallel with that, the 
States are moving toward use of open access to the distribution 
system and competitive retail markets, and away from cost-of-
service rates for retail services. That is a State regulatory 
decision and not FERC's. That movement is one of the issues 
that is spurring this whole debate over electricity 
restructuring, because it raises the question of what changes 
are needed to Federal law in order to support States that want 
to move in that direction.
    Mr. Oxley. Let me ask one last question before I turn to 
our friend from New York.
    As you know, some people have proposed sunsetting the 
authority of FERC and the State commissions to review the books 
and records of holding companies and their affiliates after 2 
years. What do you think of that proposal?
    Mr. Smith. I think that both FERC and the State regulators 
are going to need access to books and records as long as there 
are utilities with captive customers for whom you want to 
provide protection against cross-subsidization. If we were 
going to be in a world where there were no longer captive 
customers in 2 years, I think you could move away from books 
and records requirements. I don't expect that to be the case. I 
think it is highly unlikely.
    Mr. Oxley. Do you think it is highly unlikely even if PUHCA 
repeal takes place and the markets change, do you still think 
that there will be captive customers?
    Mr. Smith. At the retail level, unless there is Federal 
regulation requiring States to go to retail competition at a 
very accelerated schedule, I think it is highly unlikely. We 
are not going to have 50 States choosing retail competition in 
2 years on their own.
    Mr. Oxley. Thank you.
    The gentleman from New York Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Mr. Smith, you have had an opportunity to look at the 
pending bills. Will they provide FERC with the adequate 
authority to protect consumers and promote adequate 
competition? If not, what should we do?
    Mr. Smith. The chairman has said he supports PUHCA reform, 
along the lines that has been considered in both Houses over 
recent years, in conjunction with three or four other 
procompetitive reforms to the Federal Power Act. As I said in 
my statement, I believe that if the Commission has access to 
the books and records, it can do the regulation of cross-
subsidization that it needs to do. My understanding--I wouldn't 
want to speak for the States, but my understanding is that 
NARUC, the association of the State regulatory commissioners, 
would also support the repeal of PUHCA with books and records 
access at least as part of a comprehensive package.
    Mr. Towns. So the answer is yes?
    Mr. Smith. Yes.
    Mr. Towns. Commissioner Hunt, your testimony says that the 
SEC supports repeal of PUHCA as long as repeal preserves 
important protections for customers. I think it is page 6 of 
your testimony, you state that the House restructuring bills 
accomplish many of the goals. I guess my question is what 
protection does the SEC believe should be preserved?
    Mr. Hunt. Well, sir, what we think is that FERC and the 
State regulatory agencies should have access to books and 
records to make sure that affiliate transactions are conducted 
at fair prices and that captive consumers don't see their rates 
affected because of these affiliate transactions. So we think 
that the only way to do that is to have at the Federal level 
the FERC have access to the books and records to examine the 
terms of the transactions and for the States to have the same 
access to those books and records.
    Mr. Towns. Thank you very much, Mr. Chairman. I yield back 
the balance of my time.
    Mr. Oxley. The gentleman yields back.
    The gentleman from California Mr. Cox.
    Mr. Cox. Thank you. I think I will just pursue the same 
line of questioning because it is essentially what we are 
interested in. If everybody is for repeal of PUHCA, but we are 
now talking about what the landscape looks like in the future, 
I would like to continue to explore with you what vestige of 
PUHCA should live on, if any?
    I take it from your response, Mr. Hunt, to the last 
question that what we are concerned with is monopoly power that 
requires rate regulation, because the concern about affiliate 
transactions is designed to protect consumers, right? Consumers 
probably would not need special protections for abuse of 
monopoly power if there were not monopolies?
    Mr. Hunt. Well, I think, Mr. Congressman, part of our view 
is that the consumers, captive consumers, they need that 
protection from monopolistic power. They need agencies to 
examine affiliate transactions to make sure that those costs 
are not passed on in rates.
    If there were truly a universal competitive environment, 
perhaps that power would not be needed, but it is not there 
now. It is not going to be there in 2 years. So we think that, 
yes, the consumer protection aspects of PUHCA are those aspects 
that need to be preserved for the foreseeable future.
    Mr. Cox. I think we are on the same page. The reason for 
the different treatment of holding companies is that they may 
be exercising monopoly powers?
    Mr. Hunt. They may have a lot of power over how they 
conduct transactions with their affiliates. They buy goods and 
services from them at what cost? They sell goods and services 
to affiliate companies. What is the price at which they sell 
them? We think that, yes, consumers do need to be protected by 
having agencies that can examine those transactions to make 
sure that monopolistic power is not unfairly exercised.
    Mr. Cox. Right. So we are hanging our hat on the monopoly 
peg. But for that fact, I take it that there would be no reason 
to abandon our essential disclosure framework of the securities 
laws and to permit companies to make whatever foolish decisions 
they wish to make in their management, provided it is fully 
disclosed to the public.
    For example, if abuses that were originally concocted for 
the purpose of manipulating the rate-setting regime continued 
after there were no longer a rate-setting regime, such as 
putting property on the books at inflated prices or even 
transacting for it at inflated prices, that would put the firm 
at a competitive disadvantage in a real competitive 
marketplace, and so we would expect that the market would take 
care of that.
    Is there any reason 2 years from now, given what we expect 
the state of affairs to be, for there to be separate rules for 
the issuance of securities of holding companies?
    Mr. Hunt. No, sir, we don't think so. We think that the 
Commission has developed and the accounting profession has 
developed to such an extent that we can get adequate disclosure 
of the terms under which securities are issued, whether by 
utility holding companies or any other companies. So we don't 
think that we need special accounting or disclosure rules for 
the issuance of securities by holding companies.
    Mr. Cox. That is very useful to know. And I would like to 
ask the same question with respect to the solicitation of 
proxies and insider trading. Are the rules applicable 
generally?
    Mr. Hunt. The rules are applicable generally, and as I 
mentioned in my oral statement, Mr. Cox, we did do a staff 
study of the 1935 act in the 1980's, and a review of 
transactions by holding companies under securities laws hasn't 
indicated any need for special provisions under the securities 
laws for utility holding companies.
    Mr. Cox. And finally, if I may, Mr. Chairman, I think I 
understood you to say we don't need special rules for financial 
reporting under generally accepted accounting principles?
    Mr. Hunt. I don't think so.
    Mr. Cox. Do we need any special rules with respect to 
dividend policy or self-tenders?
    Mr. Hunt. We, sir, have not seen any problems arise in 
those areas that would require special rules for utility 
companies. Again, what we are concerned about in terms of what 
vestiges of PUHCA need to exist in the present environment are 
those remnants of PUHCA that will protect consumers. But in 
terms of the disclosure of transactions and what we consider 
the more typical securities laws, we see no reason for special 
provisions for utility companies.
    Mr. Cox. My understanding is that there are 19 companies 
that are registered under PUHCA; is that right?
    Mr. Hunt. Nineteen, sir.
    Mr. Cox. Thank you very much.
    Mr. Oxley. The gentleman from Illinois Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Mr. Hunt, in your testimony you have currently 16 employees 
who are devoted to administration of the Holding Company Act, 
doing these 19 companies.
    If PUHCA would be repealed, would the Commission see any 
savings as far as those employees?
    Mr. Hunt. If PUHCA were repealed, I don't think that we 
would--I don't think we ever thought that we would see a 
significant overall Federal Government savings from the repeal 
of PUHCA because some of the functions, again, would be 
transferred to FERC and perhaps to the States. The Division of 
Investment Management has more than enough work, I think, in 
terms of regulating investment companies these days.
    Mr. Shimkus. You know that we are very interested in all of 
these fees and charges and the big balance statement due there, 
so this may make that balance even higher if there were fewer 
employees. Just an editorial comment. You know that we are 
looking at those fees charged to people in the market.
    Mr. Hunt. Yes, sir.
    Mr. Shimkus. A lot of the deregulatory debate that has 
evolved--and of course PUHCA is always thrown into the thing. 
We had 2 days of hearings on the dereg, PUHCA is always one of 
the key ingredients. It has also come to the point of State-by-
State movement. So if a State has no captive customers and no 
bundling of their charges, and it is one of those 19 companies 
inside the State, would there be an argument for that company 
to be absolved of its requirements under PUHCA?
    Mr. Hunt. I think, if I understand your question, what we 
would like to see is that FERC and the State regulators--
particularly FERC would still have the power to have access to 
the books and records to ensure that no transactions that 
utilities engaged in unfairly harmed consumers, particularly 
through affiliate transactions. So we still think that FERC 
should have the authority to access books and records.
    Mr. Shimkus. But you are testifying for the SEC?
    Mr. Hunt. Yes, sir.
    Mr. Shimkus. Mr. Smith?
    Mr. Smith. Typically when we think about captive customers, 
we think about captive customers for sales of electricity 
either at retail or wholesale. Assuming that all of the States 
went to retail competition, you would still have regulated 
monopolies in the wires business. In distribution, for 
instance, you are likely to have a local monopoly.
    Mr. Shimkus. You will have.
    Mr. Smith. These companies will have captive customers.
    Mr. Shimkus. I think that is arguable.
    Mr. Smith. You would want to make sure that you had 
adequate protections to make sure that the charges for 
distribution, for instance, weren't cross-subsidizing 
entrepreneurial ventures.
    Mr. Shimkus. But you would have the Public Utilities 
Commission which would have a role in doing that, so then we 
would have a duplication?
    Mr. Smith. Concerns about cross-subdization of distribution 
would not be a FERC issue.
    Mr. Shimkus. Let me ask my final question. Why should the 
FERC continue to review mergers given the authority of the 
Department of Justice and the FTC? If we have the Department of 
Justice and the FTC, why should you be in the role of reviewing 
the mergers?
    Mr. Smith. First, the Federal Power Act review of mergers 
looks at a broader range of issues than the antitrust laws, 
which are focused principally on competition issues. For 
instance, in reviewing mergers, the Commission looks at impacts 
on rates, which is essentially a competition issue if you are 
talking about market-based rates, but it is a separate 
regulatory issue if you are talking about cost-of-service-based 
rates. So we apply a public interest test, which is a broader 
test.
    Second, the Commission and its staff have 60 years of 
expertise in the electric industry itself. One of the key 
issues in assessing competitive impacts for mergers is trying 
to understand the size and scope of the market in which you are 
assessing concentration.
    Mr. Shimkus. I think the chairman is going to recess for 
the vote. I think that is going to be a big focus of debate as 
we move on the bill. Thank you, Mr. Chairman.
    Mr. Oxley. The Chair would note that we have a vote on the 
floor, and we have 7 minutes. If the gentleman can ask 
questions for 2 or 3 minutes, I can recognize him. Otherwise I 
would like to dismiss this panel and start with the second 
panel when we come back. The gentleman is recognized for 3 
minutes.
    Mr. Markey. This is a very important issue, and I don't 
know if the witnesses would mind staying. I can come back and 
have my allotted time.
    Mr. Oxley. Okay. The committee stands in recess for 10 
minutes.
    Mr. Markey. Thank you, Mr. Chairman.
    [Brief recess.]
    Mr. Oxley. When we were last here, I was about to recognize 
my friend from Massachusetts, and I do so now.
    Mr. Markey. Thank you, Mr. Chairman. I appreciate it.
    Good news in today's National Journal, Congress Daily, 
``DeLay Wants Great FERC Role in Barton Dereg Bill.'' what it 
says here is that DeLay, perhaps the most powerful advocate of 
a restructuring bill, is concerned that Barton's bill does not 
give the Federal Energy Regulatory Commission enough authority 
to prevent utility monopolies from abusing their market power. 
The DeLay aide did not discuss specific remedies, but said a 
bill has got to have some kind of check on the system to 
protect the little guy from getting squashed. They don't like 
the Barton bill.
    Do you agree with that, Mr. Hunt and Mr. Smith?
    Mr. Smith. Do I agree that we need to help keep the little 
guy from getting squashed? Yes.
    Mr. Markey. And that you need additional authority beyond 
what is in the Barton bill to ensure that you can protect the 
little guy from getting squashed; do you agree with that?
    Mr. Smith. I think you heard our Chairman testify a couple 
of days ago on a number of modifications that he suggested to 
that bill that would aid our process.
    Mr. Markey. So do you agree that you need more power in 
order to protect the little guy, Mr. Smith?
    Mr. Smith. Yes.
    Mr. Markey. Mr. Hunt, do you agree that you need power than 
the Barton bill gives you in order to protect the little guy?
    Mr. Hunt. We want to get out of protecting the little guy 
in the utility industry, Mr. Markey. We think that power should 
be in the hands of FERC.
    Mr. Markey. So you think that FERC needs more power to 
protect the little guy?
    Mr. Hunt. We think--as we have already said, Congressman 
Markey, we think that certainly the FERC needs power to access 
the books and records of any holding company now under our 
jurisdiction because of PUHCA so long as there are captive 
consumers of the utility products that need to be protected.
    Mr. Markey. I understand that FERC currently addresses 
affiliate abuses by holding companies in the context of merger 
approvals.
    Other than a complaint being brought alleging 
discrimination in wholesale rates, what are the other contexts 
in which FERC could address cross-subsidization and affiliate 
abuse transactions if Congress passed the Tauzin bill as 
presently drafted?
    Mr. Smith. I think those issues would most typically come 
up in mergers, as you mentioned, but also in our setting of 
cost-based rates for either transmission or wholesale sales.
    Mr. Markey. So you can generally only deal with this in the 
context of the merger proceedings; is that right? All rate-
making?
    Mr. Smith. Rate-making.
    Mr. Markey. So what authority does the Commission have to 
take proactive steps to prevent the abuses outside of those?
    Mr. Smith. We don't look at affiliate issues outside of our 
reviews under Section 203, which relates to mergers, and under 
Sections 205 and 206, which relate to rates, terms and 
conditions.
    Mr. Markey. Do we need to fix that?
    Mr. Smith. I am not sure that we need to fix that. We need 
to have the access to the information which allows us to make 
the right judgments to protect the little guys in the context 
of those proceedings. I am not sure we need an additional 
avenue.
    Mr. Markey. Do you think that you have sufficient power to 
be able to deal with it even if you had access to the records? 
If you had access to the records, then you would have enough 
power to get the job done; is that what you are saying?
    Mr. Smith. I think we do. What we would do in a rate 
proceeding is use the information that we get to make a 
judgment as to whether there had been imprudent costs incurred 
by the entity that was charging cost-of-service rates. And if 
we concluded that there was, we would exclude those costs from 
the rates. So we would not be barring the transactions. We 
would be making sure that the company wasn't recovering those 
costs from captive customers.
    Mr. Markey. So how many times has the Commission done that 
in the past year; that is, initiate a proceeding against a 
company that is charging unjust and discriminatory rates?
    Mr. Smith. I don't know the answer off the top of my head.
    Mr. Markey. Have you ever done it?
    Mr. Smith. I am reminded that Ohio Power, for instance, 
which is one of the cases that I commented on earlier, was a 
case in which the Commission attempted to exclude imprudent 
costs from utility rates, and the DC Circuit found that we 
weren't permitted to do that because of PUHCA.
    Mr. Markey. So in the absence of FERC, you are determining 
that there are some affiliate abuses which translate into 
unreasonable rates, and it is a rare day where you guys do 
that, and the FERC has no authority to address the issue unless 
a registered holding company merges with another; isn't that 
correct?
    I am trying to help you get a little more authority, Mr. 
Smith, so you can do your job. These are friendly questions. 
They are meant for you to delimit how little authority you have 
in order to get the job done for the consumer, for the little 
guy. So we can advance the ball in the markup here.
    Mr. Smith. We would like to have sufficient authority to 
provide exactly the protections that you are describing.
    Mr. Oxley. The gentleman's time has expired.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Oxley. The gentleman from Wisconsin.
    Mr. Barrett. No questions.
    Mr. Oxley. We appreciate your testimony, and this panel is 
excused.
    Mr. Hunt. Thank you, Mr. Chairman.
    Mr. Smith. Thank you.
    Mr. Oxley. The Chair calls Ms. Sharon Heaton, vice 
president and deputy general counsel, Columbia Energy Group; 
Mr. William J. Lhota, executive vice president, American 
Electric Power Company, from Columbus, Ohio, who will explain 
the collapse of the Buckeyes in the second half at a later time 
today; Mr. Marty Kanner, campaign coordinator, Consumers for 
Fair Competition; and Ms. Sherry Quirk, shareholder, Verner 
Liipfert, on behalf of New Orleans City Council. We will begin 
with Ms. Heaton.

STATEMENTS OF SHARON HEATON, VICE PRESIDENT AND DEPUTY GENERAL 
  COUNSEL, COLUMBIA ENERGY GROUP; WILLIAM J. LHOTA, EXECUTIVE 
 VICE PRESIDENT, AMERICAN ELECTRIC POWER COMPANY, ON BEHALF OF 
      REPEAL PUHCA NOW! COALITION; MARTY KANNER, CAMPAIGN 
  COORDINATOR, CONSUMERS FOR FAIR COMPETITION; AND SHERRY A. 
  QUIRK, SHAREHOLDER, VERNER, LIIPFERT, BERNARD, McPHERSON, & 
          HAND, ON BEHALF OF NEW ORLEANS CITY COUNCIL

    Ms. Heaton. Mr. Chairman, members of the subcommittee, my 
name is Sharon Heaton, and I am deputy general counsel of the 
Columbia Energy Group, a holding company registered under the 
Public Utility Holding Company Act of 1935.
    Formerly, I served as senior counsel on the Senate Banking 
Committee, where I worked on, among other things, issues 
related to PUHCA. I am submitting testimony today to the 
subcommittee on behalf of an ad hoc group of 11 electric and 
gas utility systems, with public utility operations in 20 
States, collectively the Roundtable Group. On behalf of the 
Roundtable Group, I would like to thank you for inviting us to 
submit testimony in favor of legislation repealing PUHCA.
    The subject of today's hearing is PUHCA repeal, is the time 
now? The simple answer is no. The right time was 20 years ago, 
but now will do. And the longer we wait to repeal this statute, 
the greater the costs and disruptions in a rapidly evolving 
energy industry, with no apparent offsetting benefits.
    PUHCA, a statute enacted nearly 65 years ago, was adopted 
to remedy certain stock market abuses of the 1920's. To prevent 
a recurrence of these abuses, Congress adopted the Securities 
Act of 1933, the Securities and Exchange Act of 1934, and a 
myriad of other securities laws and regulations. SEC was also 
formed to regulate and oversee the securities markets. Not yet 
aware of the effectiveness of the newly adopted securities laws 
and the recently created SEC, Congress enacted PUHCA in 1935 to 
regulate the corporate affairs of a single operational 
industry, companies that own utility companies. PUHCA is unique 
in that it is the only securities statute designed to regulate 
a single nonfinancial industry.
    Simply put, the abuses that PUHCA was designed to prevent 
are already unlawful under other securities statute. Thus there 
is no continuing benefit to retaining PUHCA. However, there is 
a cost to allowing this statute to linger on the books. 
Continued application of PUHCA is denying electric and gas 
utilities the flexibility that they need to respond to the 
significant competitive, economic and regulatory changes 
occurring in this industry and throughout the world.
    Let's 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 is regulated by the Federal Energy Regulatory 
Commission. Repeal of PUHCA would not alter this allocation of 
jurisdiction and authority. PUHCA is intended, however, to 
regulate the corporate structure and financings of public 
utility holding companies and their 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 the Securities and Exchange Act of 1934. And in part 
for that reason, since 1982, the SEC has been on record 
favoring repeal of PUHCA. If PUHCA were simply unnecessary, its 
repeal would not be so important. But, in fact, PUHCA imposes 
structural and economic distortions on the energy industry that 
work to the detriment of energy consumers as well as 
shareholders.
    With its mandate of a vertically integrated utility system 
confined to a single geographic region, PUHCA is a clearly a 
barrier to increasing competition in the electric and gas 
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.
    Columbia Energy has a unique perspective on the importance 
of choice for consumers and competition in the utility 
industry. We have been a leader in the movement toward retail 
unbundling, allowing consumers, including homeowners, to choose 
their supplier of gas. We are proud that in Ohio alone 100 
percent of our customers are eligible to participate in our 
choice program. Those customers who have participated have 
saved more than $32 million. In fact, overall, approximately 86 
percent of Columbia Energy's nearly 2.1 million customers are 
eligible to participate in our choice programs.
    Columbia Energy will continue to promote competition in its 
own businesses and advocate government policies that facilitate 
competition.
    PUHCA should be repealed at the earliest possible date. 
Therefore, the Roundtable Group would support appropriate 
stand-alone legislation or the inclusion of satisfactory 
legislative language repealing PUHCA in an acceptable 
comprehensive bill.
    There are two very important points to consider in this 
regard. First, given the difficulty over the last several years 
of crafting a comprehensive bill with broad bipartisan support, 
we would urge the subcommittee not to let striving for the 
perfect interfere with achieving the good. For this reason, the 
Roundtable Group urges the subcommittee to approve 
expeditiously comprehensive legislation containing those 
legislative elements around which a bipartisan consensus 
already exists, such as the repeal of PUHCA.
    Second, PUHCA repeal should be clean, without lingering 
vestiges of this statute. There should be no price to pay for 
repeal of PUHCA. We raise this issue only because some forms of 
PUHCA repeal previously suggested contain unnecessarily onerous 
provisions that undermine the benefits of PUHCA repeal. The 
Roundtable Group respectfully suggests that the subcommittee 
consider beginning with the PUHCA language of H.R. 2944 which 
was introduced by Joe Barton.
    My written testimony, which I submit for the subcommittee's 
consideration and I request to be included in the record, 
contains specific comments on the PUHCA provisions of H.R. 
2944. As the SEC has known for almost 20 years now, PUHCA is an 
archaic law that has long since served its purpose. The 
Roundtable urges this subcommittee to approve legislation 
appealing PUHCA now.
    Thank you, Mr. Chairman for the opportunity to submit this 
testimony to the subcommittee.
    [The prepared statement of Sharon Heaton follows:]
 Prepared Statement of Sharon Heaton on Behalf of The Roundtable Group
    Mr. Chairman, Members of the Subcommittee, my name is Sharon 
Heaton, and I am Deputy General Counsel of the Columbia Energy Group 
(``Columbia Energy''), a holding company registered under the Public 
Utility Holding Company Act of 1935 (``PUHCA''). Formerly, I served as 
Senior Counsel on the Senate Banking Committee, where I worked on, 
among other matters, issues related to PUHCA. I am submitting testimony 
today to this Subcommittee on behalf of an ad hoc group of 11 electric 
and gas utility systems, with public utility operations in about 20 
states (collectively, the ``Roundtable Group'') 1 On behalf 
of the Roundtable Group, I 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 Roundtable Group 
is set forth in Attachment 1.
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    The subject of today's hearing is ``PUHCA Repeal: Is the Time 
Now?'' The simple answer is ``No. The right time was 20 years ago, but 
now will do.'' And the longer we wait to repeal this statute, the 
greater the costs and disruptions in a rapidly evolving energy 
industry, with no apparent offsetting benefits.
    PUHCA, a statute enacted nearly 65 years ago, was adopted to remedy 
certain stock market abuses of the 1920s. To prevent a recurrence of 
these abuses, Congress adopted the Securities Act of 1933, the 
Securities and Exchange Act of 1934, and a myriad of other securities 
laws and regulations. The Securities and Exchange Commission (``SEC'') 
was also formed to regulate and oversee the securities markets. Not yet 
aware of the effectiveness of the newly adopted securities laws and the 
recently created SEC, Congress enacted PUHCA in 1935 to regulate the 
corporate affairs of a single operational industry--companies that own 
energy utility companies. PUHCA is unique in that it is the only 
securities statute designed to regulate a single non-financial 
industry.
    Simply put, the abuses that PUHCA was designed to prevent are 
already unlawful under other securities statutes. Thus, there is no 
continuing benefit to retaining PUHCA. However, there is a cost to 
allowing this statute to linger on the books--continued application of 
PUHCA is denying electric and gas utilities the flexibility they need 
to respond to the significant competitive, economic and regulatory 
changes occurring in this country and throughout the world.
    Let's 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 Federal Energy 
Regulatory Commission (``FERC''). Repeal of PUHCA would not alter this 
allocation of jurisdiction and authority. PUHCA is intended, however, 
to regulate ``the corporate structure and financings of public-utility 
holding companies and their 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.
    If PUHCA were simply unnecessary, its repeal would not be so 
important. But in fact PUHCA imposes structural and economic 
distortions on the energy industry that work to the detriment of energy 
consumers as well as utility shareholders. 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.
    Columbia Energy has a unique perspective on the importance of 
choice for consumers and competition in the utility industry. We have 
been a leader in the movement toward retail unbundling--allowing 
consumers, including homeowners, to choose their supplier of gas. We 
are proud that in Ohio one hundred percent of our customers are 
eligible to participate in our Choice Program. Those customers who do 
participate have saved more than $32 million. In fact, overall, 
approximately 86 percent of Columbia Energy's nearly 2.1 million 
customers are eligible to participate in our Choice Program. Columbia 
Energy will continue to promote competition in its own businesses, and 
advocate government policies that facilitate competition.
    PUHCA should be repealed at the earliest possible date. Therefore, 
the Roundtable Group would support appropriate ``stand alone'' 
legislation or the inclusion of satisfactory legislative language 
repealing PUHCA in an acceptable ``comprehensive'' bill. There are two 
very important points to consider in this regard. First, given the 
difficulty over the last several years of crafting a ``comprehensive'' 
bill with broad bi-partisan support, we would urge the Subcommittee not 
to let striving for the perfect interfere with achieving the good. For 
this reason, the Roundtable Group urges the Subcommittee to approve 
expeditiously ``comprehensive'' legislation containing those 
legislative elements around which a bi-partisan consensus already 
exists, such as the repeal of PUHCA. Second, PUHCA repeal should be 
clean, without lingering vestiges of this statute. There should be no 
``price'' to pay for repeal of PUHCA. We raise this issue only because 
some forms of PUHCA repeal previously suggested contain unnecessarily 
onerous provisions that undermine the benefits of PUHCA repeal.
    In considering drafting legislation to repeal PUHCA, the Roundtable 
Group respectfully suggests that the Subcommittee consider beginning 
with the PUHCA provisions of H.R. 2944, the Electricity Competition and 
Reliability Act, which was recently introduced by Congressman Joe 
Barton. Attachment 2 contains a copy of Subtitle B of H.R. 2944 with 
our recommended changes.
    The only substantive amendment to H.R. 2944 recommended by the 
Roundtable Group would add a sunset date for both the FERC and state 
access to books and records provisions. The effective date for PUHCA 
repeal is subject to a transition period presumably to allow time for 
the states and FERC to prepare for additional oversight of holding 
companies. An additional transition period should be provided by 
maintaining the books and records requirements of H.R. 2944, but only 
for a limited time period. For example, Congress could establish a 
sunset date two years after PUHCA repeal becomes effective. The 
Roundtable Group clearly believes that FERC and state regulators should 
have access to all those books and records that are necessary to 
regulate jurisdictional utility subsidiaries within a holding company 
system. However, in an increasingly competitive environment, 
regulators, and in many case competitors, should not be permitted go on 
``fishing expeditions'' through the books and records of non-regulated 
affiliates which happen to be part of a holding company system. We must 
balance the interests of fair competition and adequate regulation.
    Most certainly, if PUHCA is repealed through ``comprehensive'' 
legislation designed to encourage utility competition, the affiliate 
oversight and access to books and records provisions now contained in 
H.R. 2944 are simply unnecessary. The competitive forces unleashed 
through such a measure should be more than adequate to substitute for 
additional regulation.
    As the SEC has noted for almost 20 years now, PUHCA is an archaic 
law that has long since served its purpose. The Roundtable Group urges 
this Subcommittee to approve legislation repealing PUHCA now.
    Thank you again, Mr. Chairman, for the opportunity to submit this 
testimony to the Subcommittee.
                              Attachment 1
                        list of roundtable group
    CMS Energy Corporation; Columbia Energy Group; Consolidated Natural 
Gas Company; Duke Energy; Edison International; MDU resources Group, 
Inc.; NiSource, Inc.; Public Service Enterprise Group; Reliant Energy, 
Inc.; Sempra Energy; and TXU Corp.
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    Mr. Oxley. Thank you, Ms. Heaton. And all of the testimony 
will be made part of the record under unanimous consent.
    The Chair would recognize my friend from Ohio to introduce 
the next witness.
    Mr. Gillmor. Thank you, Mr. Chairman, and I am pleased to 
recognize a long-time friend, Bill Lhota. He is not only one of 
the foremost public utility executives, but is an outstanding 
citizen in Ohio. I won't tell them all of the many things that 
we did years ago, Bill, but it is a pleasure to see you here.
    Mr. Oxley. By the way, the Chair was a witness to some of 
those.
    Mr. Gillmor. Don't you tell either.
    Mr. Oxley. The gentleman from Ohio, when I introduced Mr. 
Lhota, initially, I said he was going to explain the second 
half collapse of the Buckeyes against the Badgers, and now I 
see a Badger down there, so this is getting really tense.
    Mr. Gillmor. I wish somebody would explain that.

                  STATEMENT OF WILLIAM J. LHOTA

    Mr. Lhota. Thank you. I appreciate the opportunity to be 
here, and I assure you that I will make no efforts to explain 
the complexities of Ohio State football.
    I appreciate the opportunity to be here. I am Bill Lhota, 
executive vice president of American Electric Power. AEP is a 
registered holding company subject to the Public Utility 
Holding Company Act of 1935, or PUHCA.
    I wish to commend you, Mr. Chairman and members of the 
subcommittee, for your efforts during this congressional 
session and those efforts of the past several Congresses to 
support PUHCA repeal. I also thank you for the opportunity this 
morning to express the views of the Repeal PUHCA Now! 
Coalition.
    I was invited today to testify on the subject PUHCA repeal; 
is the time now? As the name of our coalition suggests, we have 
been advocating the repeal of PUHCA now since the group's 
inception in 1994, and now is the time to do so. AEP, along 
with other members of our coalition, have supported PUHCA 
repeal since the early 1980's when the SEC recommended that 
Congress repeal PUHCA. Again in 1995, following a year-long 
study conducted by the SEC that included the participation of 
all interest groups, Federal, State and local regulators, 
consumer groups, rating agencies and academia, the SEC again 
recommended PUHCA repeal with certain consumer safeguards. 
Indeed, Mr. Chairman, the support for PUHCA repeal efforts is 
reflected in the fact that our language has been included in 
more comprehensive restructuring bills than that addressing any 
other issue. Republicans and Democrats as well as the 
administration have proposed these bills.
    With this obvious consensus on the need for PUHCA's repeal, 
the question before us today is whether PUHCA should be 
repealed now or delayed until Congress decides when and if to 
enact comprehensive restructuring legislation.
    As I have mentioned, we have always supported past 
recommendations that PUHCA should be repealed on its own 
without the need to wait for comprehensive legislation. 
Certainly should Congress begin to move a comprehensive 
restructuring bill, the coalition supports the inclusion of 
PUHCA repeal language without tying repeal to retail customer 
choice.
    I will take a few minutes to explain why PUHCA needs to be 
repealed now. Any delay in PUHCA repeal, Mr. Chairman, 
continues to hamper true competition in the States that have 
under State law offered retail choice. PUHCA is a barrier to 
entry that prevents companies from fully participating in 
noncontiguous retail markets.
    Mr. Chairman, I would like to point out that a little over 
70 percent of the U.S. population lives in States that have 
approved programs that provide for retail choice. For many of 
our members, competition is upon us or is soon to come. We need 
the flexibility to compete now. Deferring PUHCA repeal limits 
registered companies' ability to offer new products and 
services to customers while our competitors move forward.
    Persistent delay in PUHCA repeal unfairly constrains the 
gas holding companies while Congress decides what to do about 
electricity restructuring. Registered gas holding companies are 
restricted under PUHCA like registered electric companies. This 
is simply unfair.
    Consistent delay of PUHCA repeal favors foreign interests 
over U.S. utilities. Foreign companies can acquire U.S. 
utilities that U.S. companies cannot.
    Mr. Chairman, and the members of this subcommittee, it may 
be a particular interest to you that stalling PUHCA repeal 
disadvantages PUHCA companies in the financial markets. There 
will be continued delay in our ability to issue new types of 
securities that could lower our cost of capital. PUHCA 
prohibits without SEC approval the issuance of any newly 
created securities that have been embraced by the market and 
issued by other utilities. PUHCA may also limit the use of our 
generally accepted financial risk management products. Surely 
at some point, Mr. Chairman, this inequity must end.
    Mr. Chairman, our coalition supports the PUHCA repeal 
provisions of the Barton bill, H.R. 2944, and the Tauzin-Towns 
bill, H.R. 2363. These bills provide for the replacement of 
PUHCA with a reformed PUHCA. The legislative language contained 
in these bills is a product of more than 4 years of negotiation 
and congressional scrutiny. It addresses the concerns of SEC, 
FERC and State regulators. It guarantees FERC and the States 
access to books and records of the registered holding companies 
and their associate companies to protect the ratepayers. It 
continues all existing authority for the FERC and the States to 
review affiliate transactions.
    The coalition strongly opposes any language to tie PUHCA 
repeal to retail choice in the States where we operate, and any 
proposal that creates a new exemption under PUHCA on the 
companies offering retail choice. This approach is unfair, 
unworkable and anticompetitive.
    Mr. Chairman, I would like to conclude by emphasizing to 
you and the members of the subcommittee that only Congress can 
repeal PUHCA, and the time to act is now. Thank you, again, Mr. 
Chairman and members, for your interest in this important 
issue, and I will be glad to respond to questions at the 
appropriate time.
    [The prepared statement of William J. Lhota follows:]
   Prepared Statement of William J. Lhota, Executive Vice President, 
    Energy Delivery and Customer Relations, American Electric Power 
        Corporation on Behalf of The Repeal PUHCA Now! Coalition
    Mr. Chairman and Members of the Subcommittee: The Repeal PUCHA Now! 
Coalition is pleased to submit this testimony to address the need to 
repeal the Public Utility Holding Company Act (otherwise known as 
PUHCA). The Repeal PUHCA Now! Coalition is a group of electric and gas 
companies which has supported enactment of legislation repealing PUHCA 
as recommended by the Securities and Exchange Commission in a report to 
Congress in 1995. Member companies include registered and exempt 
electric and gas utility holding companies restricted under PUHCA. The 
Repeal PUHCA Now! Coalition believes it is essential that PUHCA repeal 
legislation be enacted into law this year. Simply put, repealing PUHCA 
repeals an Act that serves as a barrier to competition, a barrier to 
state restructuring efforts and a barrier to consumer benefits.
    The Coalition commends the Subcommittee for conducting a hearing on 
PUHCA so that the need and urgency for repeal may be made again this 
Congress. As discussed below, the Coalition believes that PUHCA repeal 
must be considered independently, on its own merits. Indeed, keeping 
the 64-year old statute in place frustrates competition, is a barrier 
to entry, and actually promotes industry concentration. When this 
occurs, the case for repealing PUHCA now is overwhelming.
                            i. introduction
    As everyone here knows, the electric utility industry is changing 
rapidly. A little over 70% of the U.S. population live in the twenty-
three states that have now approved customer choice programs. Other 
states are considering similar measures. As electricity markets become 
more and more competitive, the unnecessary limitations of PUHCA on 
certain utility holding companies and their subsidiaries are not 
compatible with the current and evolving state of the industry. PUHCA 
is outdated, duplicative and no longer serves the interests of 
consumers or investors as noted in the SEC's 1995 report which 
recommended that PUHCA be repealed. PUHCA has become a regulatory 
anachronism, a barrier to competition and innovation. It imposes 
unneeded restrictions, significant costs, and confers no real benefit. 
The time to act to repeal PUHCA is now and the Repeal PUHCA Now! 
Coalition urges the Congress to pass PUHCA repeal legislation this 
year.
    PUHCA repeal should not be held hostage to the important debate 
about the potential further restructuring of the electric industry, or 
whether comprehensive federal electricity legislation is needed to 
benefit all consumers nationwide. From state to state and here in 
Washington, the members of the Repeal PUHCA Now! Coalition have been 
very active in this debate. But the Congress must realize that electric 
utility restructuring issues impact all stakeholders in the electric 
utility industry, not just the eighteen (18) active registered holding 
companies and one hundred fifty-one (151) exempt electric holding 
companies. These electric utility restructuring issues deserve serious 
study, discussion and debate. This discussion and debate is well 
underway in the Congress. Already in this Congress, there are no less 
than twelve bills, including the Administration's bill, currently 
pending in the Congress that would in various respects restructure the 
electric utility industry. As the number and scope of the various bills 
reflect, the issues are as contentious as they are complex. As a 
result, no meaningful consensus has emerged on whether, or if so, when 
Congress should enact comprehensive electricity legislation. A truly 
durable consensus will not develop overnight. Moreover, there is no 
public policy reason to support postponing PUHCA repeal until a 
restructuring bill is passed. Thus, the Repeal PUHCA Now! Coalition 
strongly urges that the debate on future electric policy move forward 
separately from consideration of PUHCA repeal legislation.
    Keep in mind, Mr. Chairman, that serious debate and discussion of 
these global electric policy issues has only developed in the last two 
Congresses. Conversely, a full merits review of PUHCA repeal started 
over seventeen years ago. In 1982, the SEC found that PUHCA's statutory 
objective had been achieved and recommended PUHCA repeal to Congress. 
In the intervening seventeen years, the case has been overwhelmingly 
built to show that conclusion was correct. Significantly, in 1995, 
after conducting another full study that included public hearings and 
participation of whether PUHCA continues to have relevance given the 
significant statutory and regulatory developments since 1935, the SEC 
again concluded that PUHCA was no longer needed. With appropriate 
consumer protection provisions to assure effective regulation of 
utilities, repeal was the preferred option.
    The Repeal PUHCA Now! Coalition agrees. The SEC's 1995 report 
supporting PUHCA repeal is clear and irrefutable. Indeed, it has now 
been over twenty-five years since the SEC accomplished the goals 
Congress set for it under PUHCA in 1935. We agree with the SEC that 
leaving PUHCA in place unduly burdens a segment of the industry, as 
well as the SEC, and at a cost to society that far exceeds any 
potential benefits.
    Repealing PUHCA is important not just to the companies that for 
over 64 years have borne the burden of its regulatory requirements, and 
whose ability to respond to existing competition is handicapped by that 
Act, but to other utilities--both gas and electric--as well. On this 
issue, gas and electric registered holding companies are united: we all 
need the ability to respond more freely and flexibly to market 
opportunities emerging daily as the States restructure retail electric 
markets and respond to vigorous competition in the wholesale markets.
    Similarly, holding companies now exempt from the Act's requirements 
again both gas and electric--also seek repeal. The potential 
application to them of the Act's full strictures, and the current 
imposition of limits on their ability to serve customers geographically 
or through additional utility services, hinders innovation and 
frustrates an exempt holding company's ability to compete in wholesale 
and retail markets.
    While the future structure of the electric industry remains open to 
debate, there is a much clearer picture with respect to the natural gas 
industry. The gas industry has already experienced significant and 
historic regulatory and competitive changes. All the gas registered 
companies now face competition in virtually every facet of their 
business. Yet they remain subject to additional regulation over their 
lines of business, corporate structures and financing that their 
competitors do not have. This is because PUHCA's regulations impose 
higher costs and less flexibility on them, which hampers them in 
meeting the demands of intensely competitive gas markets. Thus, repeal 
of PUHCA, that is, repeal of PUHCA with appropriate consumer 
safeguards, is essential in providing these gas companies with a level 
playing field on which to compete and develop innovative products and 
services. PUHCA should be repealed while the regulatory agencies and 
legislatures, including Congress, consider further changes in energy 
policy as applied to the electric industries.
                        ii. the burdens of puhca
    Registered holding companies and their subsidiaries face burdensome 
and limiting requirements under PUHCA. These burdens, which create 
severe disadvantages when compared to other industry participants, 
include:
    Our non-utility subsidiaries and we generally are restricted in our 
ability to issue or sell securities, or alter the rights and powers of 
security holders, without prior SEC approval. As a result, (a) our 
capital structures are much more limited, (b) our ability to take 
advantage of new financing opportunities, especially in dynamic capital 
markets, is more limited, and (c) our ability to use several types of 
financial structures that are now widely accepted and used throughout 
the rest of our industry are not available to us without SEC approval.
    We are limited to serving utility customers as a ``single 
integrated'' utility system, which seriously restricts the geographic 
scope of our utility operations as well as the size and diversity of 
our utility services to customers. As a result, registered holding 
company system companies are hampered in offering services to others, 
even in our core business, either by significantly expanding our 
operations or investing in other utilities, as can be done by exempt 
holding companies and non-holding company utilities. Although multi-
state utility expansion is possible through a non-holding company, 
divisional structure, (i.e., as a single operating company with no 
separate utility subsidiaries), most companies do not choose this 
structure. In some states this structure is illegal and in many states 
it would not be permissible under developing state codes of conduct 
designed to separate utilities from competitive businesses.
    We generally need prior approval from the SEC before our affiliates 
and subsidiaries can enter into contracts with each other. As a result, 
certain costs may be ``trapped'' due to overlapping jurisdiction 
between the SEC and the state commissions and opportunities to cut 
costs or to operate with efficiencies, available on short notice, may 
not be available to registered holding company subsidiaries.
    Without SEC approval, we are unfairly restricted from diversifying 
into other lines of business--under existing SEC interpretations, 
because we are limited to operating a single integrated utility 
business, plus only such other businesses as ``reasonably incidental, 
or economically necessary or appropriate'' to the operation of an 
integrated utility business. Even with some recent SEC initiatives, 
business opportunities that would help additional economic development 
in our service territories, and even business opportunities that if 
allowed to operate freely would save our customers money, may be 
foreclosed to us. In addition, even where there are limited exemptions, 
they often contain technical requirements that prevent the use of 
efficient business structures or restrict or limit the manner in which 
registered companies can employ shareholder capital.
     PUHCA restricts registered electric holding company acquisitions 
of natural gas distribution companies. Historically, the SEC has been 
reluctant to view an electric system and a natural gas system as 
capable of constituting a ``single integrated public utility system''. 
The agency has allowed electric registered holding companies to 
``retain'' a gas system only if it determines that the antiquarian 
standards of the Section 11 ``ABC Clauses'' are met. This requirement 
effectively precludes most existing electric registered holding 
companies from acquiring even a neighboring gas system and gaining the 
competitive convergence benefits enjoyed by numerous combination 
(electric and gas) exempt holding companies or non-holding company 
utility systems. A registered holding company may satisfy the ``ABC 
clauses'' only if it acquires or merges with an existing combination 
company and it can demonstrate to the SEC that the otherwise stranded 
utility assets would be uneconomic or not viable.
    Even the exempt holding companies, although free of virtually all 
of the specific corporate restrictions in PUHCA, are limited to serving 
utility customers in a specific geographic area, lest they lose their 
exemption. They also must be concerned about diversification, because 
the SEC has the power to revoke their exemption under the so-called 
``unless and except'' clause. Finally, even exempt holding companies 
are subject to the ``two bite'' requirements under PUHCA, which require 
SEC approval in the event of certain acquisitions.
    Although they were important at the time of the Act's passage, the 
draconian nature of these restrictions and the penalty for 
noncompliance make little sense today, especially as other federal and 
state regulatory agencies have evolved, the capital markets have 
matured, and the utility industry is restructuring. In the 64 years 
since 1935, the governance of securities markets has become much more 
effective and efficient. The SEC's authority under the Securities Act 
of 1933, the Securities Exchange Act of 1934, and the Trust Indenture 
Act of 1939 is very broad and the requirements under those laws assure 
that investors receive appropriate and timely information upon which to 
make informed investment decisions. Moreover, there is extensive 
financial and corporate information available commercially through 
hundreds of magazines, newsletters, on-line computer services, and 
network sources, which enable the markets to respond within hours of 
significant events. Nationally recognized rating agencies, such as 
Moody's and Standard & Poor's, constantly evaluate our management, 
financial integrity, and operations and rate our securities 
accordingly. As a capital-intensive industry, we are especially 
dependent on access to the financial markets and ultra-sensitive to 
changes in the cost of our capital. Thus, we are committed to 
maintaining financial integrity while striving for flexibility through 
assuring a strong capital structure and favorable securities ratings by 
such agencies.
    Similarly, other federal and state utility regulatory agencies, 
including the FERC and the state utility commissions, clearly have 
significant jurisdiction, staff support and the means to regulate 
multi-state utility systems in 1999; this regime largely was absent in 
1935 at the time PUHCA was adopted. The standardization of utility 
accounting, better staffing and more clearly defined regulatory 
jurisdictional requirements have all made rate-regulation more 
effective.
    In light of the changes the electric industry is experiencing 
today, and especially in light of the authority that already exists in 
the SEC under the federal securities laws, the FERC and the state 
commissions regarding the securities markets and rate matters, even the 
SEC, the regulatory body charged with administering PUHCA, has formally 
stated that PUHCA has become redundant regulation and should be 
repealed. PUHCA lacks the flexibility to allow regulated companies to 
adapt to new circumstances. Its model of the utility industry simply no 
longer comports with the reality of where the industry is heading, 
which is where the other regulators including the FERC, the State 
legislatures and State Commissions are pushing. We need permanent 
relief today from the unnecessary regulatory burdens imposed by the 
Act.
 iii. disadvantages faced by registered holding companies under puhca 
                         concerning financings
    PUHCA restricts any registered holding company system company from 
issuing any security or exercising any rights generally affecting the 
holders of an outstanding security of such company, with certain 
exceptions for so-called ``routine financings.'' PUHCA does allow these 
companies to engage in certain routine financing activities only by 
making certain filings with the SEC or if the financing qualifies under 
one of its limited exceptions. PUHCA requires the same information to 
be filed as is already required to be filed under the Securities Act of 
1933, in many instances, thus creating duplicative filing and 
disclosure requirements. PUHCA thus creates additional filing 
requirements with the SEC's PUHCA office, which in the case of certain 
applications, the SEC has wide discretion to reject.
    Under the complex filing system created by PUHCA, registered 
holding company systems face a disadvantage, as compared to exempt 
companies and all other public utility and non-utility companies within 
the U.S., when issuing certain securities. As an initial matter, both 
registered and exempt companies must register securities to be issued 
to the public with the SEC as required by the 1933 Act. However, PUHCA 
may require additional filings for the registered holding company 
system company. This additional filing, which may require affirmative 
action by the SEC, results in delay, added expense, and inevitably to 
missed opportunities in financial markets.
    A similar hurdle exists for certain registered holding company 
system companies, resulting in added delay and expense, even with 
respect to the issuance of exempt securities in Rule 144A, transactions 
or financings under Rules 501, 502, 503, and other rules permitting 
exempt financing transactions under the 1933 Act. These rules allow 
exempt company subsidiaries to sell certain securities to qualified 
investors while utilizing abbreviated disclosure requirements set forth 
under the 1933 Act unencumbered by PUHCA. PUHCA, however, still 
requires registered holding company systems to make these additional 
filings unless the transaction qualifies for one of the limited 
exemptions under PUHCA.
    Another major handicap faced by registered holding companies is the 
delay and expense involved in organizing financing subsidiaries. While 
exempt holding companies and other public utilities face virtually no 
restrictions, registered holding company systems generally must obtain 
SEC authority to organize new subsidiaries and to provide needed 
guarantees by the registered holding company or certain affiliates. 
Therefore, registered holding company systems suffer increased costs of 
financing which effectively penalizes the registered holding company 
systems compared with other utilities and public companies for no 
apparent policy reason given the 1933 Act and other federal and state 
regulatory requirements.
    Even upon the filing of additional disclosure, PUHCA contains 
additional unnecessary restrictions given the requirements under the 
1933 Act and the 1934 Act. These additional criteria put registered 
holding company systems at a disadvantage by increasing a company's 
cost of capital, both in restricting the types of securities that can 
be issued with SEC approval and increasing the delay before permitted 
securities can be issued in instances where SEC approval is required.
    The SEC has attempted to provide limited administrative relief by 
amending its rules to permit certain routine financing transactions by 
subsidiaries of a registered holding company without SEC approval and 
issuing so-called ``omnibus financing orders'' authorizing a broad 
range of transactions by registered holding company systems. These 
attempts fall short of the relief that is needed, however, by failing 
to adequately expand the types of securities permitted to be issued by 
registered holding company system companies and by continuing to 
require state commission approval of regulated subsidiary financings. 
The ``omnibus orders'' generally permit a specific company to issue 
securities similar to those already permitted under PUHCA, such as 
certain common stock, first lien mortgage bonds, bank loans, unsecured 
debt, certain guarantees of securities of affiliates, or refunding 
debt. On the other hand, the orders overly restrict the issuance of 
even these securities, by setting forth conditions that are unnecessary 
in today's financial market place. For instance, ``omnibus orders'' 
have disallowed financings where the effective cost of money on debt 
securities exceeds a gross spread over comparable term U.S. Treasury 
securities which is consistent with comparable investment grade 
securities. Thus, even permitted securities may be disallowed due to a 
structure that, though perhaps perfectly acceptable in the financial 
markets, is deemed too risky by the SEC at a particular time.
    In addition to the aforementioned restrictions, ``omnibus orders'' 
generally further do not provide for the issuance, or restrict the use, 
of many types of securities that have been embraced by the securities 
markets over the past few years. Significantly, the omnibus orders 
generally permit the issuance of only enumerated securities, thus 
preventing registered holding company systems from taking timely 
advantage of new or recently created securities. Furthermore, the 
inflexibility of PUHCA and the immense burden of continually filing 
applications may frustrate the timely use of recently created financial 
products already commonly accepted by the market. Examples include the 
requirement to obtain specific SEC approval, in some instances, before 
issuing Trust Originated Preferred Securities (TOPrS) and Quarterly 
Income Preferred Securities (QUIPS), or using caps, collars, and other 
derivatives transactions to hedge against the risk inherent in certain 
securities.
    Further evidence of the unfairness in this area is reflected in the 
disparate treatment of registered gas companies. PUHCA restricts the 
SEC's ability to approve long-term debt of registered electric holding 
companies except in narrow cases involving the few combined companies 
and under ``emergency'' circumstances. Thus, in most instances, unlike 
registered gas utility holding companies, registered electric holding 
companies are not permitted to issue long-term debt securities. 
Registered gas holding companies, therefore, are able to take advantage 
of certain financial products at the holding company level such as 
TOPrS and QUIPS, while electric utility holding companies can only 
issue those securities at the subsidiary level. This disadvantage 
sometimes results in the issuance of securities in amounts smaller than 
that generally regarded as efficient in the capital markets due to 
investors'' preference for large, liquid issues. All other things being 
equal, smaller issue sizes cost more than large, more liquid issues. 
This restriction clearly prevents the electric registered holding 
companies from taking full advantage of their asset base. The SEC has 
continued to impose these restrictions in the face of the market 
discipline that has been imposed in recent years by the assignment of 
ratings on securities issues by the nationally recognized rating 
agencies and the disclosure requirements under the 1933 Act and the 
1934 Act.
    These limitations and additional approval requirements under PUHCA 
disadvantage registered holding company systems by effectively raising 
their cost of capital. For example, as previously mentioned, under 
current regulations and ``omnibus orders,'' registered holding 
companies are restricted in the types of new financing which they may 
incur as well as the financial hedging tools which they may use to 
lower their cost of capital. Exempt companies, and other public 
companies, are free to take advantage of new, innovative financial 
products widely offered by reputable U.S. investment banking firms and 
thus can more easily achieve a lower cost of capital while maintaining 
financial stability. On the other hand, PUHCA restrictions often hinder 
a registered holding company system from taking full advantage of these 
opportunities and, in doing so, compete on a ``level playing field'' 
with exempt holding companies and non-utility companies in effectively 
financing their operations.
    There is no area where this inequity is clearer than in the 
inability for registered holding company systems to take advantage of a 
state public utility commission's order for recovery of stranded costs 
without SEC approval. Many states have enacted statutes that provide 
the opportunity for utilities to recover stranded or transitional costs 
in order to prepare for retail competition. Such recovery is through 
the issuance of transition bonds that securitize transition charges to 
be collected from customers over time. Transition bonds typically are 
structured in such a way that they are rated triple-A. However, even 
though state public utility commissions pursuant to specific state 
legislation authorize the issuance of these transition bonds, 
registered holding company systems must then ask the SEC for authority 
to enter into these transactions. Additionally, many of the financing 
documents must be filed with both the state commission and pursuant to 
the SEC's Securities Act of 1933 and to require a third filing with 
PUHCA introduces yet another layer of redundancies and costs without 
providing any additional control. Exempt companies clearly have an 
immense edge by being able to engage in these financing transactions to 
issue transition bonds and recovering stranded costs with lower 
transaction costs and without potential interference or delays under 
PUHCA.
    In the SEC's 1995 report recommending repeal of PUHCA, the Division 
of Investment Management suggested that ``the SEC permit registered 
companies wider latitude to structure the types and terms of their 
securities to the demands of the market in order to achieve the lowest 
possible capital costs.'' However, the SEC has yet to find the 
flexibility it needs under PUHCA to allow registered holding company 
systems the opportunities to achieve the lowest possible capital costs. 
Again, the time to repeal PUHCA is now.
                  iv. debunking the myths about puhca
    There is strong bipartisan support for PUHCA reform. In the last 
two Congresses, PUHCA repeal bills have had cosponsors from both sides 
of the aisle. Both Democratic and Republic Administrations, dating back 
to the Reagan Administration, support PUHCA repeal. While not everyone 
may agree on all the details of potential federal electric utility 
restructuring legislation, there is strong support that the time for 
PUHCA to be repealed is now. With this in mind, it may be helpful to 
address several of the ``last gasp'' arguments against repeal.
   myth no. 1: puhca prevents utilities from exercising market power.
    Contrary to the myths about PUHCA preventing the exercise of market 
power, PUHCA actually perpetuates market concentration. Companies 
subject to PUHCA generally are confined within geographic boundaries 
consistent with the ``integration'' standard. While at one time this 
was considered a way of stopping growth, and enabling federal and state 
utility regulation to mature, it has instead led to a concentration of 
the utility market. This market concentration that occurs in a monopoly 
situation serves to impede competition and frustrate state 
restructuring programs. If PUHCA stays in place, it will only 
perpetuate a monopoly situation for those consumers in that service 
territory.
    Now the Coalition realizes that some have asserted that it is 
essential to retain PUHCA in order to limit what they call 
``concentration of market power'' as the electric industry 
restructures. Those who make that assertion simply do not understand 
the role PUHCA has played. As stated earlier, PUHCA is a corporate 
structure and securities statute. Its main goal was corporate 
simplification, not establishing or setting specific rates for utility 
services. We cannot emphasize enough that PUHCA's existing provisions 
actually increase the likelihood of concentrations in particular 
markets, because the ``integration requirements'' and geographic 
restrictions of the Act limit both registered companies and exempt 
companies to retail utility holdings in particular areas, and restricts 
the ability of more distant companies to acquire, construct or operate 
facilities that could compete with the local utility. PUHCA effectively 
keeps new entrants out of markets, and keeps registered companies from 
engaging in competitive lines of business. Indeed, PUHCA as it stands 
requires utilities to limit acquisitions to nearby utilities--ones that 
can be integrated or that do not result in a loss of exempt status. 
Those nearby utilities are the ones most likely to have presented the 
possibility of competition.
    PUHCA was originally enacted to prevent abuses by utility companies 
by restricting growth and advancements at a time when there were little 
or no state or federal utility regulatory controls available. While 
this approach served us well in 1935, it is now outdated and serves as 
an impediment and a barrier to a competitive market, especially at the 
retail level.
    PUHCA was not designed as, and is not, a utility or rate regulation 
statute. PUHCA is primarily a law dealing with corporate governance and 
securities issues. Aside from the fact that it has outlived its 
usefulness because of changes in the way we regulate and review 
securities transactions, PUHCA might be viewed as an energy matter only 
from the standpoint that the companies it governs happen to be in the 
energy sector. Regulating public utilities when they provide 
electricity services to consumers is governed by other significant 
laws. These laws, most notably the Federal Power Act, the Natural Gas 
Act, and other state utility laws, deal with the rates consumers pay 
for electricity and gas services. PUHCA does not. In fact, PUHCA repeal 
bills introduced and vetted in the last two Congresses, with consumer 
protection provisions, actually will help state and federal public 
utility regulators do their ratemaking job. To withhold PUHCA repeal 
from moving forward due to concerns about market concentration in a 
time when competition in the retail market is rapidly moving forward 
sends conflicting policy signals. Competition is good, unless you are a 
registered holding company. A competitive, free market, over the long-
term, provides low prices and efficiencies for our consumers, but long-
term benefits will be denied the consumers served by the 18 active 
registered holding companies.
       myth no. 2: repealing puhca will create a regulatory gap.
    Repealing PUHCA will not create a regulatory gap, it will eliminate 
one. Ever since the U.S. Supreme Court issued the Ohio Power decision, 
PUHCA's requirements that affiliate contracts be ``at cost'' have 
prevented FERC and state regulators from applying a market test to 
lower costs of services for wholesale and retail consumers in most 
cases. This decision, in large measure, has protected utilities'' costs 
in rate bases and, to a significant degree, has preempted FERC and 
state regulators from disallowing the recovery of certain costs. With 
the repeal of PUHCA, this regulatory gap will be eliminated once and 
for all. The rate regulators, will properly have, at both the wholesale 
and retail levels, the authority to determine the allocation and 
reasonableness of costs incurred by the utility in the provision of 
necessary services and whether or not such costs should be recovered in 
rates. Currently PUHCA hinders such rate regulation.
    Yet, despite the need to repeal this outdated act, many are 
concerned that repeal of PUHCA is a repeal of consumer protections. 
This is simply not true.
    It is important to remember that there are more than 3,000 entities 
currently providing electric and gas service to consumers. Of these, 
approximately 170 are holding companies. However, approximately 151 
holding companies are exempt from PUHCA, leaving PUHCA to regulate the 
18 active registered holding companies. Repealing PUHCA does not mean 
these registered holding companies will no longer be regulated. It only 
means they will be regulated under a number of other statutes, 
including all state public utility laws, the Federal Power Act, and the 
Natural Gas Act. There will be no regulatory gap if PUHCA is repealed.
    Yet the cries continue that PUHCA cannot be repealed because it 
protects consumers. What about the majority of individuals who are 
served by utilities not covered by PUHCA? Who is currently protecting 
them?
    Repealing PUHCA will not hurt consumers. Retaining the status quo 
will. If a consumer is served by a company regulated under PUHCA, that 
company is restricted from entering into competitive transactions, 
expanding into new business areas and improving efficiencies that stand 
to benefit the consumer.
    In fact, stand alone PUHCA repeal bills introduced and vetted in 
the last two Congresses provide continued protection for consumers, 
while eliminating unnecessary agency duplication and deleting arcane 
provisions that no longer serve a public interest purpose. These repeal 
bills actually improve certain important aspects of federal and state 
utility regulation. Some have argued that this may be financially 
burdensome to states; however, the ongoing restructuring of the 
electric utility system has imposed significant new responsibilities on 
the states, involving numerous companies and issues. The states have 
been in the lead in taking on these responsibilities. Surely, with the 
experience the states have had to date with restructuring issues, they 
will be able to effectively deal with any potential resource issues.
    The various stand alone PUHCA repeal bills introduced and vetted 
during the last two Congresses also fully provide for protection of 
consumers by providing access to books and records, by maintaining 
accountability procedures, by providing for review of affiliate 
transactions, while continuing FERC and State commission rate 
regulation and audit authority. These are a far more direct means of 
addressing market concerns and protecting consumers than PUHCA of 1935 
can provide in today's market.
    The Repeal PUHCA Now! Coalition recognizes that some state 
commissioners and other ratepayer advocates have expressed concern that 
state authority would not be sufficient to obtain the necessary 
information for proper discharge of state regulatory action. They are 
concerned that there would be a continuing need, after repeal of PUHCA, 
for federal audit authority and federal oversight of system 
transactions that would pass costs through to ratepayers. The Coalition 
understands those concerns. We also understand the significant 
difference between repealing the Act while providing for certain 
safeguards, and simply transferring the existing burdensome 
requirements to a new forum. We believe PUHCA repeal legislation, such 
as the PUHCA repeal provisions of H.R. 2944, H.R. 2363, and S. 313, can 
fully address these concerns and include provisions to provide 
appropriate access to books and records.
    With regard to books and records, all utility companies know full 
well that the books and records of the utility company must be 
available to regulators for their review. The burden will remain on a 
utility to demonstrate that its proposed rates are just and reasonable. 
Similarly, we understand and can accept a review of the books and 
records of those affiliates that deal with the utility company and that 
would thereby pass costs through in rates. Regulators should have 
access to all information that is relevant in reviewing and 
establishing rates for electric services. However, there are 
undoubtedly some affiliates in a diversified company that will not pass 
costs through to ratepayers, or whose activities are so removed from 
the utility activities that access to their books and records would be 
of no legitimate value for ratemaking or cost allocation purposes. The 
key test is what access actually is necessary for the effective and 
proper discharge of duties of the regulatory authority involved.
    As to the oversight of affiliate transactions, again we understand 
the interest of regulators in reviewing those transactions involving 
the utility, and which will cause the incurrence of costs to be passed 
through to ratepayers. Indeed, many state regulatory commissions 
already review transactions between a utility and its affiliates, and 
no further authority is needed. Here again, to the extent it affects 
rates, we do not oppose reasonable affiliate transaction provisions in 
a PUHCA repeal bill. However, we can also envision a number of 
transactions between affiliates completely apart from the operating 
utility companies, and which would not cause the incurrence of costs to 
the utility. Where the affiliate contractual arrangements are not 
related to costs to be incurred or passed through in the utility's 
regulated rates, separate regulatory review of the interaffiliate 
transactions would be unnecessary.
      myth no. 3: more utilities will merge if puhca is repealed.
    As noted earlier, the competitive transformation of the utility 
industry is underway. Twenty-three states have now enacted 
restructuring legislation or regulations. Similar to every other 
heavily regulated industry that has undergone a competitive transition, 
some consolidation of service providers is inevitable. But contrary to 
myth, consolidation will not occur exclusively because of PUHCA repeal, 
and whatever consolidation takes place will not escape significant 
regulatory review and oversight.
    It is important to recognize several facts about mergers and market 
power assertions if PUHCA is repealed. First, the very same expert 
agencies and departments who today substantively review mergers will do 
so after PUHCA is repealed. FERC will retain all of its merger 
authority. It has recently updated its merger policy in light of 
changes occurring in the electric utility industry. Without PUHCA, FERC 
will still review future mergers unconstrained by any new Ohio Power or 
other similar regulatory conflicts at the federal level. State 
Commissions will still have their authority to approve, block or 
condition mergers that they have today under state law. State 
legislatures that wish to require that a utility company operating in 
that state must be incorporated in that state and remain fully subject 
to the state's authority regarding its securities and other corporate 
matters, can continue to do so. PUHCA's repeal will have no effect on 
that. The Department of Justice will retain its antitrust authority, 
and the FTC its Hart-Scott-Rodino authority. The only thing that will 
change when PUHCA is repealed is that after all of those approvals are 
given, the SEC will no longer have the unnecessary and duplicative 
regulatory burden of again stating its deference to the decisions the 
other regulatory agencies previously have reached.
    Mr. Chairman, let us be clear: when PUHCA is repealed, no merger 
will occur without the same full regulatory scrutiny that occurs today. 
If there are efficiencies and benefits to be gained, those mergers 
should go forward. If there are not, there is ample regulatory 
authority in the hands of knowledgeable and fully empowered regulators 
to stop them.
    Simply put, we believe that the nation's state and federal 
regulators have ample authority and the ability to review potential 
mergers and to protect the consumer. There is no deficiency of federal 
and state utility regulatory means and authority requiring PUHCA to 
stay in place to effectively review and govern the inevitable 
consolidation of the utility industry. Removing the SEC from reviewing 
mergers will not diminish these protections.
   myth no. 4: puhca cannot be repealed until retail competition is 
                              established.
    Effective retail competition can not be established unless and 
until PUHCA is repealed. PUHCA's requirements and restrictions unduly 
limit and burden virtually any utility company owning or operating any 
utility assets for the production, transmission, transportation or 
distribution of electric energy, or manufactured or natural gas, within 
the United States. As discussed more fully below, not Congress, the 
states, or the FERC can create a truly competitive environment with 
PUHCA remaining in place.
    In reviewing the issues that may need to be addressed this year, 
Congress should keep in mind the level of activity concerning retail 
choice in the states and at the FERC. As you know, almost every state 
currently has some type of electricity restructuring proceeding 
underway. As previously stated, twenty-three states have established 
retail competition frameworks.
    Congress has wisely given the states and FERC significant time and 
latitude in picking the pace, method and means for achieving retail 
competition. This approach has allowed the states to proceed with 
retail competition tailored to their own regional circumstances. This 
has provided Congress and regulators critical information and 
experience to make informed decisions about any potential comprehensive 
federal legislation.
    Based upon the evidence to date, the states that are restructuring 
are in fact moving forward without federal intervention. From 
California to New York, Arizona to Arkansas, Maine to Maryland, the 
states have passed laws or regulations to establish retail competition. 
Thus, the real question for the Congress to focus on is whether the 
sixty-four year old statute is impeding the numerous state initiatives 
to restructure retail electric markets. Does PUHCA help or hurt the 
existing and future efforts to establish state ordered retail 
competition?
    In the Coalition's view, keeping PUHCA in place will hurt state 
ordered establishment of retail electric competition. Simply put, the 
scope of retail competition will be artificially constrained and 
truncated by a number of PUHCA's regulatory restrictions. Let us give 
you several examples.
    PUHCA forbids domestic Exempt Wholesale Generators (``EWGs'') from 
selling power at retail. As a result, many low-cost generation 
suppliers refrain from making retail sales because of PUHCA-related 
concerns. This applies to all entities--whether registered, exempt or 
non-holding companies. Indeed, any generation supplier wishing to avoid 
a holding company structure would face potential PUHCA jurisdiction if 
it were to setup a subsidiary and that subsidiary were to make retail 
sales.
    Registered holding companies interested in making retail sales from 
facilities that are distant from their franchised retail service areas 
must face the geographic constraints of PUHCA's ``integration'' 
standard, which, as noted above, generally restricts registered company 
``utility'' operations to a regional scope. This means, for example, 
that a registered holding company based in the Eastern U.S. would be 
effectively excluded from selling retail power from a facility located 
in California. Similarly, an exempt holding company can risk its exempt 
status by undertaking non-EWG sales outside the geographic boundaries 
defined by Sections 3(a)(1) and 3(a)(2). Thus, for example, a utility 
holding a Section 3(a)(1) ``intrastate'' exemption cannot make 
substantial retail sales outside the state where the utility is 
incorporated and conducts most of its utility business. This does not 
promote economic efficiency or a robust retail generation market.
    In addition, many state restructuring laws call for or are 
contemplating the separation of generation and transmission/
distribution assets into separate corporate entities. This aspect of 
restructuring can cause particular problems for both registered and 
exempt holding companies. Think about it: can a 64-year-old piece of 
legislation be applied to a different utility business than was 
conceivably envisioned in 1935? PUHCA was not designed to be flexible. 
PUHCA mandates a single geographically and operational integrated 
structure, not well adapted to an evolving industry as a result of 
federal and state restructuring competition initiatives. As noted 
earlier, PUHCA isolates electric and gas systems to limited, discrete 
geographic areas. The requirement under PUHCA that registered holding 
companies maintain a single, integrated utility business has quickly 
become problematic as governmental entities and a growing competitive 
market pressures companies to restructure. As electric utilities are 
compelled by state legislation, regulation or competitive forces to 
either ``unbundle'' utility functions and assets in an effort to 
restructure their businesses along product lines or comply with 
corporate unbundling requirements, the conflicts with PUHCA are 
becoming acute.
    PUHCA controls this ``unbundling'' process unnecessarily. Yet the 
``unbundling'' already has begun as a result of FERC's ``open access'' 
transmission orders, the twenty-three state restructuring plans already 
under way, the Public Utility Regulatory Policies Act of 1978 
(``PURPA''), and the Energy Policy Act of 1992 (``Policy Act''). This 
``unbundling'' has produced significant new players with geographically 
widespread utility properties. Since the new players under PURPA and 
the Policy Act are exempt from PUHCA, how can PUHCA's geographic 
integration requirements be significant and necessary to this changing 
industry?
    There is another aspect of PUHCA's integration requirements, which 
may be at odds with retail competition unbundling of functions and 
services. Registered holding company systems are required to operate in 
an integrated manner. This requirement has led to centralized electric 
system planning, construction, and the use of: (a) companies providing 
common management, financial, accounting and planning services, among 
other services, for all companies, utility and non-utility alike, in 
the same system, (b) fuel companies serving various affiliated 
companies and (c) companies operating power plants for various 
affiliated companies. In addition, for registered holding company 
systems and their integrated operations, it has been a prevalent 
practice to have common officers, and in many cases, common directors 
among affiliated companies. Will these integrated planning, service and 
personnel requirements be appropriate and workable in a disaggregated 
and competitive electric business where flexibility is necessary?
    A number of registered holding companies have divested or are 
planning to divest their electric generator assets and will operate in 
restructured systems where their retail customer base will be open to 
competition. It is unclear that the integration standard will have any 
relevance under such circumstances.
    For a multistate registered holding company, PUHCA is a major 
concern as states move forward to competition. PUHCA restricts our 
ability to compete. This is attractive to our ``unregulated'' 
competitors as they move forward unimpeded. PUHCA restricts the types 
of business we can invest in, where we can invest and how much capital 
we can deploy. Restricted investments, required integration systems and 
financial prohibitions severely impact our structural and financial 
ability to respond to a rapidly moving competitive retail market. If a 
level playing field is sought, for a competitive market, PUHCA stands 
out as a significant barrier to achieving this goal.
    Technology is another issue. PUHCA was adopted in a world without 
computers, without reliable transmission systems, without regional 
power pools, without reliable long-distance communication. Technology 
was one reason for PUHCA's geographic integration limits. Obviously, 
technology has rendered PUHCA, and its integration requirements, 
obsolete.
    A prominent feature of current FERC policy and most state 
restructuring frameworks is the establishing of so-called Regional 
Transmission Organizations (``RTOs'')--whether they are an independent 
transmission company (``Transco'') or an Independent System Operator 
(or ``ISO``). These RTOs typically assume in some fashion control of 
the regional or statewide electric transmission grid in order to assure 
further non-discriminatory access and efficient, reliable system 
operation.
    PUHCA presents a potential regulatory dilemma for some RTOs, since 
these entities may, depending on the facts, fall under the definition 
of ``electric utility company'' under Section 2(a)(3) of PUHCA--that 
is, an RTO will ``operate facilities used for the generation, 
transmission, or distribution of electric energy for sale . . .'' 
Indeed, in order to perform their mandate effectively, RTOs must 
necessarily exercise operational control over transmission grid 
facilities.
    RTOs are not the kind of public utility entities that PUHCA was 
designed to regulate. Yet because RTOs could, under certain 
circumstances, be deemed to be PUHCA ``electric utility companies'', 
any person or company which might be regarded as exerting a 
``controlling influence'' over an RTO could in turn be deemed a 
``holding company'' potentially subject to full PUHCA regulation. This 
is a very real concern. To be sure, the SEC Staff has issued a no-
action letter concurring that the California ISO is not a PUHCA 
``electric utility company'' because it is an ``instrumentality'' of 
the State of California, based on the State legislature's restructuring 
directive. However, the means of RTO creation varies from region to 
region, and most RTOs will operate on a regional, rather than a 
statewide basis, and with or without state authority. The PUHCA 
uncertainties associated with the structure and operations of RTOs may 
cast a regulatory cloud over a vital aspect of state and federal 
restructuring efforts. It is unclear how the SEC will deal with this 
critical issue, especially now that most of the RTOs that have been 
approved to date have been and are also power pools, which have not 
been regarded as creating a holding company structure for member 
utilities. Thus, on the one hand, RTOs will be critical to successful 
restructuring efforts. On the other hand, PUHCA may impede RTOs from 
developing regionally, with broad-based membership.
    The corporate or functional unbundling features of current 
restructuring programs can also be highly problematic for utilities 
holding a Section 3(a)(2) exemption. Section 3(a)(2) provides an 
exemption for holding companies that carry on the bulk of their utility 
activity at the parent company level, with only minor utility 
subsidiary operations. Thus, for example, if a parent utility company 
must transfer to a subsidiary company substantial generation assets to 
comply with state initiated restructuring law, it may no longer qualify 
for a Section 3(a)(2) exemption, since the bulk of its utility 
operations may now be conducted downstream at the subsidiary level.
    In addition, restructuring mandates may effectively compel a 
utility to create a new holding company over generation, transmission/
distribution, and non-utility subsidiaries, as a means of assuring 
effective corporate separation (unbundling) of utility functions and 
safeguarding against potential cross-subsidization. The creation of 
such a top-tier holding company with no utility assets of its own, 
however, precludes retention of a Section 3(a)(2) exemption (which 
requires that the parent holding company also be a utility company).
    In sum, over the long-road PUHCA will hinder state restructuring 
efforts. PUHCA is an entry barrier, impeding robust retail competition. 
State driven restructuring presents potential problems for the ability 
of registered companies to comply with PUHCA's requirements and compete 
in newly created retail markets. Registered companies are subject to 
the ``integration'' standard, which demands, among other things, that 
utility operations be component parts of a vertically integrated 
system. This standard clearly clashes with emerging competitive systems 
based on unbundled service, independent system operators, and power 
exchanges. And, ironically, state restructuring requirements will 
likely endanger certain utilities' existing exemptions and thus compel 
them to become registered holding companies.
    Leaving PUHCA intact as state restructuring proceeds will create 
perverse incentives, as companies recreate ``PUHCA Pretzels'' 
especially regarding transmission assets--to comply with PUHCA's broad 
reach, restructure their products and services, and to compete in 
retail electricity markets. This federal barrier to state enacted 
retail competition reforms can only be removed by the Congress. That is 
why PUHCA repeal legislation should be signed into law this year, and 
without the need for ``comprehensive'' federal restructuring 
legislation.
                   v. pending puhca repeal proposals
    The Coalition supports legislation that repeals PUHCA and replaces 
it with a streamlined regime that provides for adequate measures to 
provide consumer protections as a stand-alone measure. We support 
Congressmen Tauzin (R-LA) and Towns (D-NY), and their cosponsors in 
their bipartisan effort to enact H.R. 2363, the ``Public Utility 
Holding Company Act of 1999,'' to ensure that another Congress does not 
conclude without considering PUHCA repeal. We support its companion 
Senate bill, S. 313 by Senators Shelby (R-AL) and Dodd (D-CT). We also 
support the PUHCA repeal provisions of H.R. 2944, the ``Electricity 
Competition and Reliability Act,'' introduced by Congressman Barton (R-
TX).
    Some background is necessary to understand the genesis and 
evolution of the provisions of H.R. 2363, S. 313, and H.R. 2944. These 
provisions arose out of the SEC's 1994-1995 yearlong study on PUHCA's 
continued relevance in today's evolving electric and gas markets and 
sophisticated utility oversight. The SEC study began in July, 1994, 
with a round-table hearing at which consumer groups, securities rating 
agencies, Local, State and Federal regulators, and industry 
representatives all analyzed PUHCA's effectiveness and continued with 
an invitation to all interested parties to submit comments on all 
aspects of PUHCA, pro and con. The SEC received thousands of pages of 
comments, with only one out of over 110 participants suggesting that 
PUHCA should not be repealed or reformed. All other interested parties 
agreed that PUHCA needed significant revisions. And today, no 
knowledgeable party that understands the role of PUHCA argues that 
PUHCA should not be significantly reformed. Those that argue for delay 
or for the continuation of PUHCA do so are unmindful of the 
overwhelming case made for repeal by the objective experts.
    Following the SEC's 1995 report to Congress, a bipartisan bill was 
drafted incorporating the consumer protection provisions the SEC 
recommended. This bill was introduced in the 104th Congress. (S. 1317 
by Senators D'Amato (R-NY) and Sarbanes (D-MD), et al.). S. 1317 was 
voted out of the Senate Banking Committee after extensive hearings and 
mark-up and was awaiting final consideration by the full Senate before 
that Congress adjourned. A companion bill (H.R. 3601 by Congressman 
Tauzin, et al.) was introduced in the House but was not reported out of 
committee, notwithstanding several extensive hearings on the SEC's 
report and proposed legislation before the House Commerce Subcommittee 
on Energy and Power and the then Subcommittee on Telecommunications and 
Finance.
    In the 105th Congress, a similar PUHCA repeal bill was introduced 
in the Senate. (S. 621 by Senators D'Amato, et al.). It too was 
reported out of the Senate Banking Committee with amendments designed 
to provide additional consumer protections but, again, Congress 
adjourned prior to action by the full Senate. A companion bill to that 
Senate bill was introduced in the House. (H.R. 3976 by Congressman 
Tauzin, et al.). And again, notwithstanding additional committee 
hearings on the need to repeal PUHCA, no action was taken by the House.
    Thus, the PUHCA repeal provisions of H.R. 2944, and the PUHCA 
repeal bills, H.R. 2363 and S. 313, reflect several years of 
negotiations and collaboration between the FERC, the SEC, NARUC, 
Congressional staff, as well as various industry stakeholders. They 
represent a carefully developed and negotiated compromise and are ripe 
for congressional action. They set forth sufficient consumer protection 
provisions in a regulated, yet evolving restructured market. These 
bills grant FERC in wholesale rate proceedings, and the State 
commissions in retail rate proceedings, access to books and records of 
holding companies and their associate companies for the review of costs 
proposed to be recovered by regulated public utilities in their 
jurisdictional rates. These bills allow FERC and the state commissions 
to exercise their existing authority to review affiliate transactions 
between regulated and non-regulated associate companies within holding 
company systems. FERC is empowered to determine which utilities will be 
exempt under the new PUHCA, including those currently exempt from PUHCA 
of 1935 and those currently free from FERC jurisdiction. Additionally, 
the bill continues all existing authority FERC and the States have 
under the Federal Power Act and all applicable State laws, 
respectively, to protect consumers.
    In the event that Congress is unwilling to repeal PUHCA as a stand-
alone bill this year, the Coalition supports legislative language that 
has similar provisions to the PUHCA repeal provisions of H.R. 2944, and 
the PUHCA repeal bills, H.R. 2363 and S. 313, and, as discussed below, 
several of the bills already introduced this Congress contain these 
provisions.
    The Coalition strongly opposes, however, any language that 
conditionally repeals PUHCA. As discussed more fully below, there 
exists no substantive reason why PUHCA repeal should be tied to retail 
competition.
    PUHCA repeal provisions similar to the PUHCA repeal provisions of 
H.R. 2944, and the PUHCA repeal bills, H.R. 2363 and S. 313, have been 
reproduced in four bills introduced in this Session of Congress. 
Although essentially the same, each are different and will be discussed 
in greater detail.
    H.R. 667, ``The Power Bill,'' introduced by Congressman Burr (R-
NC), contains language identical to the stand-alone bill introduced by 
Congressman Tauzin in the 105th Congress (H.R. 3976). It does not 
condition the repeal of PUHCA of 1935 recognizing that PUHCA stands in 
the way of effective competition within the several States. It requires 
the keeping of certain books and records by holding companies and their 
subsidiary companies and provides FERC and the States access to such 
records if deemed relevant to disallow any cost recovery in a rate 
proceeding. Like the H.R. 2363, it authorizes FERC to exempt companies 
from these requirements. However, unlike H.R. 2363 that provides for a 
12-month effective period from date of enactment, the Burr bill 
provides for an 18-month effective period. Thus, it is identical to S. 
313 that has been reported out of the Senate Banking Committee and is 
awaiting final action by the full Senate in the 106th Congress.
    H.R. 1587, the ``Electric Energy Empowerment Act of 1999,'' 
introduced by Congressman Stearns (R-FL), contains language similar to 
the unconditional repeal PUHCA legislation introduced in the 104th 
Congress prior to the original Senate Bill being amended. But for 
relatively minor differences in the stated purpose of the repeal 
section, its provisions are identical to H.R. 3601 by Congressman 
Tauzin, et al., and S. 1317 by Senator D'Amato, et al., of the 104th 
Congress. While the Coalition does not object to these provisions of 
H.R. 1587, is should be noted that the provisions of H.R. 667, H.R. 
1828 and H.R. 2363 contain amendments adopted by the U.S. Senate and 
incorporated in subsequent PUHCA repeal bills since the 104th Congress. 
(See H.R. 3976 by Congressman Tauzin, et al., and S. 621 by Senator 
D'Amato, et al., of the 105th Congress). These amendments clarified 
certain definitions and provided for certain exemption authority by the 
FERC. Like Tauzin's H.R. 2363, the Stearns bill's provisions become 
effective one year from date of enactment.
    H.R. 1828, the ``Comprehensive Electricity Competition Act,'' 
introduced on behalf of the Administration by Congressmen Bliley (R-VA) 
and Dingell (D-MI), contains repeal provisions virtually identical to 
the Tauzin and Burr bills. Like the Burr bill, Bliley's bill repeals 
PUHCA 18 months after the date of enactment. With this effective date, 
these provisions are identical to those of S. 313 awaiting final 
consideration by the full Senate.
    H.R. 2050, the ``Electric Consumers'' Power To Choose Act of 
1999,'' introduced by Congressmen Largent (R-OK) and Markey (D-MA), 
contains PUHCA repeal provisions similar to those of H.R. 2363 but 
differs in one major way. PUHCA of 1935 is not unconditionally repealed 
as in H.R. 2363 but rather only if all but one of the states within the 
service territory of public utilities of a holding company system 
provides for retail electric or gas access. If two or more states 
within the service territory of a registered holding company system 
have not provided for retail access, PUHCA's onerous restrictions 
continue to apply.
    The Coalition strongly opposes this provision. This approach is at 
odds with the consensus that now exists on the Committee that Congress 
should not mandate retail access on the states. Thus, Congress should 
not enact any legislation that ties PUHCA repeal to whether the states 
order retail access in their respective states.
    H.R. 2050 also differs from H.R. 2363 in two less significant ways. 
First, the provisions are effective 18 months from date of enactment. 
Second, an ``exempt telecommunications company'' (ETC) authorized in 
the Federal Telecommunications Act of 1996 is added to the list of 
those entities exempted from the PUHCA provisions. The Coalition 
prefers a 12-month effective date since sufficient time has elapsed for 
states to address any perceived regulatory gaps since the 1995 SEC 
report recommending repeal but has supported bills with an 18-month 
effective date. The Coalition does not object to the exemption of ETCs.
    As described more fully under our attempt to debunk the several 
myths surrounding PUHCA's repeal, PUHCA repeal should not be held up 
for full-fledged competition. The current restrictions under the Act 
are preventing the affected companies from offering many services now 
that would benefit consumers. There cannot be effective competition if 
the electric and gas utility segment of the competitive market 
continues to be hampered by the Act. And even in those states that have 
not or do not provide for retail competition, PUHCA is not needed to 
protect consumers.
    There also has been one proposal suggesting that another class of 
exemptions be created under PUHCA rather than repealing the Act. 
Current holding companies registered under PUHCA would be permitted to 
become exempt from PUHCA's restrictions if each of the public utilities 
of a holding company's system unilaterally offers retail choice to its 
customers even if their respective States have not mandated retail 
choice.
    There are several problems with this approach. First, all experts 
agree that PUHCA should be repealed now because it (1) unnecessarily 
prevents companies from becoming competitive, (2) is not necessary as 
part of today's regulatory regime even without retail competition and, 
(3) because it has accomplished its goals. An exemption would continue 
an unnecessary, burdensome regime for which no continuing purpose 
exists.
    Second, many exempt companies today support PUHCA repeal because it 
limits their flexibility and efficiencies both structurally and 
financially. Adding another exemption simply increases the burdens on 
all exempt companies. Rather than removing obstacles to competition and 
efficiencies, this proposal would perpetuate them.
    Third, such a provision is punitive to companies operating in the 
several States that have decided for local reasons not to offer retail 
choice to its citizens at this time. It is unclear how companies can 
offer such choice to its customers they are obligated to serve in such 
states. PUHCA companies are faced with a clear dilemma: If a State does 
not believe allowing a company the ability to offer choice, the only 
real option left is the sale of the company to an entity that is not 
subject to PUHCA. What are the public policy goals of such a proposal?
                             vi. conclusion
    In conclusion, the Repeal PUHCA Now! Coalition believes it has 
addressed the various issues of concern that have been raised about 
repeal of this statute which, as the SEC has noted, is outdated and no 
longer needed. Consumer protections will still be provided, market 
power problems are not compounded and regulatory guardians will still 
vigorously oversee the exercise of market power through review of rates 
and merger activities. If we are for fair wholesale and retail 
competition, where numerous firms compete under similar regulatory 
restrictions, then removal of PUHCA is a key component to a competitive 
environment. We urge the Congress to repeal PUHCA this year.

    Mr. Oxley. Thank you, Mr. Lhota.
    Mr. Kanner.

                    STATEMENT OF MARTY KANNER

    Mr. Kanner. I would submit that the question is less when 
and whether to repeal PUHCA, and more whether we want to 
advantage the competitive interests of one segment of the 
industry or rather to advantage the interests of competition.
    PUHCA--as was previously stated, PUHCA does not directly 
address rate regulation. It does, however, create a structure 
to facilitate effective regulation to protect consumers and to 
prevent unfair competition.
    And I believe that those goals, those underlying objectives 
of PUHCA, remain equally valid and, in fact, more important as 
the industry evolves and as we go toward that competitive end 
state.
    I agree that consumers are better under competition, as you 
said, Mr. Chairman. That is exactly the ideal that we should 
strive for. However, we need to create the conditions in which 
competition can, in fact, survive. Stand-alone PUHCA repeal 
would impede competition, not advantage. It would increase the 
ability--it would increase concentration in the industry, with 
certain players becoming larger and larger, rather than 
fostering the emergence of more and different types of 
competitors. It would facilitate subsidized ventures in which 
utilities would be able to leverage their monopoly functions, 
their continued monopoly control of distribution and 
transmission to subsidize their competitive ventures, whether 
those are in energy sales in different parts of the country or 
in businesses unrelated directly to energy, but in other 
services like appliance installation and repair, securities, 
other things. And then last, it would put consumers at risk of 
bearing the costs of those other ventures if they prove not to 
be successful.
    It was stated earlier that in a competitive marketplace, if 
a business is successful, if they innovate, if they are 
entrepreneurial, they bear the benefits, and if not, they bear 
the risks. When you have companies that have one foot in each 
camp, part regulatory, part monopoly, and part a competitive 
venture, then it is not the company that bears those risks, but 
rather the consumers in that regulated venture. That is not the 
type of market we believe we need to end up with.
    Can PUHCA be repealed? Absolutely, Mr. Chairman. But we 
need to do it with provisions which advance competition and 
protect consumers. Many of those were detailed today in the 
earlier panel by Mr. Smith, the FERC general counsel. As he 
said, we need to make sure if we want competition that all 
players play by the same rules in that highway of commerce, the 
Nation's transmission system. We need to make sure that the 
vestiges of market concentration, of market power, do not 
inhibit competition in the generation market. We need to make 
sure that mergers are all reviewed to ensure that we don't 
unduly create an increase in competition.
    There are certain types of mergers under PUHCA that are 
reviewed that would not be reviewed in the absence of PUHCA. 
The bills before you today, the stand-alone PUHCA provisions, 
don't grant FERC the authority to look at holding-company-to-
holding-company mergers or the disposition of generation 
assets. That needs to be accomplished.
    And last, we need to make sure that we have vigorous 
provisions that address affiliate cross-subsidization. As long 
as there is that one foot in the regulated business, there is 
the ability to cross-subsidize competitive ventures. That is 
not fair to the consumers that bear the risks and costs. That 
is not fair to the competitors in those other business lines. 
We need to make sure that there are effective provisions 
dealing with affiliate transactions. The access to books and 
records isn't something that can be repealed in 2 years because 
utilities will continue to be regulated monopolies in the 
distribution and transmission functions.
    Last, Mr. Chairman, we need to make sure that the 
underlying objectives of PUHCA, again, creating a structure in 
which competitors and consumers are protected, is upheld. We 
don't have to do that in the same regulatory model. We can go 
to the competitive model, but we need to make sure that we are 
creating the conditions necessary for competition to exist and 
thrive.
    [The prepared statement of Marty Kanner follows:]
  Prepared Statement of Marty Kanner on behalf of Consumers for Fair 
                              Competition
    Mr. Chairman, members of the Committee, I am Marty Kanner. I am 
testifying today on behalf of Consumers for Fair Competition (CFC), a 
coalition of residential and industrial consumer representatives, small 
business interests, local regulators, public interest groups, and 
public and private utilities.1
---------------------------------------------------------------------------
    \1\  American Public Power Association, Electricity Consumers 
Resource Council (ELCON), Enron, Friends of the Earth, Madison Gas & 
Electric, Missouri River Energy Services, National Association of State 
Utility Consumer Advocates (NASUCA), Northern California Power Agency, 
Ohio Municipal Electric Association, Office of Ohio Consumers Counsel, 
Transmission Access Policy Study Group (TAPS), Wisconsin Public Power 
Inc., National Alliance for Fair Competition (members include: Air 
Conditioning Contractors of America, Air Conditioning & Refrigeration 
Wholesalers Association, American Supply Association, Associated 
Builders and Contractors, Independent Electrical Contractors, Petroleum 
Marketers Association of America, Plumbing, Heating and Cooling 
Contractors--National Association, National Electric Contractors 
Association, Sheet Metal and Air Conditional Contractors National 
Association)
---------------------------------------------------------------------------
    CFC was formed to advance policies necessary to promote effective 
competition--and necessary to provide the intended consumer benefits of 
lower rates, increased efficiencies and innovation, and diversity of 
supply options. 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. Don't 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 several bills introduced 
in the House, 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 model legislation, for inclusion in comprehensive 
restructuring legislation, that provides the necessary checks on 
potential anti-competitive behavior. With adoption of these provisions 
in a comprehensive bill, 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:

 Multi-state 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;
 Multi-state 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 anti-competitive 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 15 multi-state 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 non-utility 
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 non-utility 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 non-recourse debt, preclude inter-
affiliate loans, or otherwise insulate captive consumers from risky 
financial transactions.
2. Cross-Subsidization Taxes Consumers
    Holding companies can subsidize non-regulated 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 non-regulated 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 non-utility 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.
    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 
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 anti-competitive consequences;
 They argue that it is necessary to establish retail energy 
        services company, ignoring the case-by-case action (and pending 
        SEC rule) to enable such ventures;
 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 PUCHA 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. It is 
worth noting that, in California--a state on the leading edge of 
implementing retail competition--the Public Utility Commission adopted 
a resolution opposing stand-alone PUHCA repeal.
    The members of Consumers for Fair Competition stand ready to assist 
this Committee in crafting those policies needed to promote effective 
competition and consumer protection.

    Mr. Oxley. Thank you.
    Ms. Quirk.

                  STATEMENT OF SHERRY A. QUIRK

    Ms. Quirk. Thank you, Mr. Chairman.
    I am here today happy to address this subcommittee to talk 
about a fair transition to competition. We are pleased to 
discuss the future of PUHCA. Because New Orleans is served by a 
utility subsidiary of a registered holding company, Entergy, we 
believe that the concerns of the city council may assist the 
subcommittee members in understanding how PUHCA helps retail 
regulators protect captive consumers and why repealing PUHCA 
before comprehensive restructuring legislation is passed is a 
bad idea.
    We are not aware of a single consumer group that supports 
stand-alone PUHCA repeal. The City Council of New Orleans has 
assumed the unique position of regulator of retail electric and 
gas rates. The council serves in the same capacity as a State 
utility commission and seeks to ensure that retail electric and 
gas consumers in the city are provided affordable and reliable 
service.
    One footnote I would drop here is we noticed in Ms. 
Heaton's testimony some marked up amendments to the repeal 
PUHCA language. We note that one amendment would actually 
repeal the vote of the citizens of New Orleans to establish 
regulatory authority, and we would note very strong objection 
to having the vote of the citizens overturned in that way.
    Continuing, because a repeal of PUHCA on a stand-alone 
basis threatens both the affordability and reliability of 
retail electric and gas service in New Orleans, the council 
opposes the passage of bills which don't include appropriate 
consumer and power market protections. Many States have sought 
to introduce retail competition plans to lower rates for 
consumers. Louisiana, a relatively low-cost State, has not 
decided to pursue retail competition presently. The city 
council has made a similar decision for the time being. 
However, if Congress repeals PUHCA without accompanying 
consumer and market power provisions, the relative low cost of 
electric rates in New Orleans will be jeopardized. This is 
because PUHCA limits diversification and requires utility 
companies to separate utility and nonutility industries so that 
captive utility consumers in New Orleans do not subsidize 
business ventures elsewhere in the U.S. and abroad.
    The SEC has jurisdiction over contracts and relationships 
among the various affiliates whether they are in the energy 
area or outside. By preventing cross-subsidization of other 
industries, PUHCA was intended to help the States keep rates 
low and affordable.
    Some proponents of stand-alone PUHCA repeal have argued, 
however, that State law and State rate-making authority can 
protect retail consumers in the absence of PUHCA. These 
arguments are misleading for several reasons. First, the 
commerce clause of the Constitution prevents State regulators 
from regulating utility businesses in other States. States 
cannot effectively police interstate affiliate transactions.
    Second, the SEC's own report proposing PUHCA reform even 
acknowledged that many States lacked the authority to regulate 
utility holding company operations in the same manner as under 
PUHCA.
    Third, the judicial doctrine of Mississippi Power & Light 
raises questions about State rate-making authority where the 
FERC has blessed the recovery of costs in the wholesale rate 
from an affiliate. And in this respect, the books and records 
provisions in H.R. 2363 offer little in the way of benefit for 
retail regulators. By allowing utilities to diversify without 
giving State regulators the tools to address affiliate and 
market power abuses, merely giving access to books and records 
is like throwing a drowning person a lifeline with no one 
attached to the other end.
    In addition to affordability, the council worries about 
reliability. With the repeal of PUHCA, the lines between 
regulated and nonregulated industries will disappear, and while 
the rates for retail consumers may be regulated, the city 
council will have no certainty that power sales will continue 
in a reliable manner.
    Consider the possible scenario where power costs increase 
due to demands for electricity brought about by hot weather. If 
a State regulator is relying on its utility to supply power to 
captive ratepayers from generation facilities which are 
supposed to provide system supply, but the utility can make 
more money by selling power in the competitive market, how can 
the regulator be sure that the utility will not make off-system 
sales that would bring in more revenues than the regulated 
sales? With limited resources and an octopus corporate chart, 
how will any State regulator ever unravel this knot?
    I am not here today to pick on Entergy. Entergy is a fine 
corporate citizen of New Orleans and an excellent utility, but 
without PUHCA's structural restrictions, Entergy and other 
registereds are between a rock and a hard place, caught between 
their fiduciary to shareholders to maximize profits and an 
obligation to serve consumers. It is essential to recognize 
this quandary and provide structural protections so that 
utilities have clear rules of the road.
    What should this subcommittee do to address the regulatory 
holes that would appear with stand-alone PUHCA repeal? We would 
suggest meaningful market power protections which have been 
discussed here, effective RTOs, codes of conduct to separate 
regulated and nonregulated activities, audit authority, and 
repeal of Mississippi Power & Light.
    The city council believes that the biggest problem with 
PUHCA repeal without comprehensive legislation is human nature. 
If part of your business was regulated so that you knew that 
every dime of cost would be recovered plus profit, and part was 
subject to competitive forces, where would you allocate your 
high costs and poor investments?
    Thank you for the opportunity to testify, and I will 
welcome your questions.
    [The prepared statement of Sherry A. Quirk follows:]
Prepared Statement of Sherry A. Quirk, on Behalf of the City Council of 
                              New Orleans
    Thank you, Mr. Chairman and members of the Subcommittee for the 
opportunity to appear before you today to discuss the Public Utility 
Holding Company Act of 1935 (``PUHCA'' or ``Act''). My name is Sherry 
Quirk, and I am testifying on behalf of the City Council of New Orleans 
(``Council''). I serve as regulatory counsel to the City Council.
    The Council is the governing authority of the City of New Orleans 
(``City'' or ``New Orleans'') and exercises legislative power under the 
City's Home Rule Charter. The Council has, by vote of its citizens, 
assumed the rather unique position of regulator of retail electric and 
gas service in New Orleans. In this role, the members of the Council 
serve in the same capacity as state utility Commissioners. The members 
of the Council therefore seek to ensure that retail electric and gas 
consumers in New Orleans are provided affordable and reliable service.
    As a regulator of retail electric rates in the City of New Orleans, 
the City Council relies on PUHCA to protect customers served by the 
area's multi-state registered holding company, the Entergy Corporation. 
The proponents of stand-alone PUHCA repeal have characterized their 
efforts as non-controversial, but in reality, stand-alone repeal would 
seriously harm electricity consumers throughout the United States. 
Because the repeal of PUHCA on a stand-alone basis threatens both the 
affordability and reliability of retail electric and gas service in New 
Orleans, the Council opposes the passage of bills such as H.R. 2363 
introduced by Congressman Tauzin (R-LA). The Council believes that the 
repeal of PUHCA outside of comprehensive legislation is untimely, 
unwarranted, and unwise.
PUHCA and Consumer Protection
    PUHCA was enacted in response to widespread market power abuses by 
mammoth holding companies in the early part of this century. During the 
1920s and 1930s, the massive size and incredibly complex structures of 
public utility holding companies, and the increased concentration of 
control they held over the electric power system, caused concern at 
both the state and the federal levels. Although states tried to control 
interstate holding companies and utility subsidiaries by enacting their 
own laws, holding companies created organizational structures that 
extended across state lines and placed the holding companies beyond the 
reach of the state commissions.
    In a letter urging Congress to pass PUHCA, President Franklin D. 
Roosevelt stated:
        We seek to establish the sound principle that the utility 
        holding company so long as it is permitted to continue should 
        not profit from dealings with subsidiaries and affiliates where 
        there is no semblance of actual bargaining to get the best 
        value and best price . . . Except where it is absolutely 
        necessary to the continued functioning of a geographically 
        integrated operating utility system, the utility holding 
        company with its present powers must go . . . It is a corporate 
        invention which can give a few corporate insiders unwarranted 
        and intolerable powers over other people's money. In its 
        destruction of local control and its substitution of absentee 
        management, it has built up in the public-utility field what 
        has justly been called a system of private socialism which is 
        inimical to the welfare of a free people . . .1
---------------------------------------------------------------------------
    \1\ President Franklin D. Roosevelt, Message from the President of 
the United States Transmitting a Report of the National Power Policy 
Committee With Respect to the Treatment of Holding Companies (1935), 
reprinted in Senate and House of Representatives Hearings, Legislative 
History of the Public Utility Holding Company Act of 1935, at 2309-311) 
[``Message from President Roosevelt''].
---------------------------------------------------------------------------
    The principal purpose of PUHCA was to prevent the reoccurrence of 
holding company abuses. Among the abuses that PUHCA sought to address 
was:

 Issuance of securities on the basis of fictitious or unsound 
        asset values.
 Issuance of securities by subsidiary companies under 
        circumstances such that the company must support an over 
        capitalized structure.
 An absence of arm's-length bargaining, resulting in subsidiary 
        companies paying excessive charges for services, construction 
        work, equipment, and materials.
 Allocation of charges by the holding company among its 
        subsidiaries in different states to avoid regulation by state 
        commissions.
 Control a holding company has over its subsidiaries, affecting 
        the policies of the subsidiaries to complicate and obstruct 
        state regulation of the subsidiaries.
 Extension of holding companies designed to bear no relation to 
        economy of management and operation or to the integration and 
        coordination of related operating properties.
 Lack of economy of management and operation, efficiency and 
        adequacy of service, effective public regulation, and economies 
        in raising capital.
    In addition to providing the Securities and Exchange Commission 
(``SEC'') with the stability to ensure that, in the future, RHCs would 
not engage in market power abuses, PUHCA also provided a mechanism for 
reorganizing and simplifying the structures of registered holding 
companies (``RHCs'') that wanted to retain their holding company 
structure (e.g., the SEC section 11 work).2
---------------------------------------------------------------------------
    \2\ Until approximately 1955, the SEC's administration of the Act 
focused primarily on the first function of PUHCA (e.g., reorganizing 
the industry under section 11 ``integration requirement''). At the time 
PUHCA was enacted, registered holding companies controlled 
approximately 80 percent of the electric and gas utilities. When the 
SEC began its ``section 11 work'' of simplifying the industry in 1938 
(the Act provided for a three-year delay in implementation), there were 
214 registered holding companies. By the time the SEC completed its job 
of simplifying the industry in 1955, the number of registered holding 
companies was down to 25.
---------------------------------------------------------------------------
    PUHCA was intended to prevent holding companies from taking 
absolute control of the utility at the expense of the customer. A 
cornerstone of PUHCA's goal of protecting consumers is a philosophy of 
decentralization. In his letter encouraging Congress to enact PUHCA, 
President Roosevelt wrote, ``Most of us agree that we should take 
control and the benefits of the essentially local operating utility 
industry out of a few financial centers and give back that control and 
those benefits to the localities which produce the business and create 
the wealth.'' 3
---------------------------------------------------------------------------
    \3\ Message from President Roosevelt at 2309-311.
---------------------------------------------------------------------------
    The Energy Policy Act of 1992 amended PUHCA and established two new 
classes of exempt entities--exempt wholesale generators (``EWGs'') and 
foreign utility companies (``FUCOs''). These PUHCA-exempt categories 
served to encourage RHC diversification through investments in foreign 
utilities and generating facilities. After passage of the PUHCA 
amendments and pursuant to its regulatory authority, the SEC 
promulgated Rule 53-- a ``safe harbor'' provision that allows a RHC 
that meets certain conditions to finance and invest up to 50 percent of 
its retained earnings in foreign ventures. Under its rules, the SEC may 
authorize exemptions to this 50 percent investment limitation. 
Additionally, the SEC promulgated Rule 58 to allow an RHC to invest in 
``energy-related companies'' as long as the aggregate investment does 
not exceed the greater of $50 million or 15 percent of the consolidated 
capitalization of the RHC.
    For approximately 60 years, PUHCA has provided important consumer 
protections for the ratepayers of RHCs, as well as assurances to 
investors that these companies are financially responsible. Under 
PUHCA, the SEC is the only regulatory body with the authority to 
regulate the complicated financial transactions of RHCs, including 
intra system transactions and diversification into unregulated 
businesses. Together, PUHCA's provisions ensure that RHCs pay 
sufficient attention to the needs of the system operating companies so 
that ratepayers obtain a reliable level of service at a reasonable 
price.
Now is Not the Time for PUHCA Repeal
    In this Congress, a number of bills with the sole purpose of 
repealing PUHCA have been introduced. H.R. 2363, the ``Pubic Utility 
Holding Company Act of 1999,'' introduced by Congressman Tauzin, would 
repeal PUHCA effective 12 months after enactment. In repealing PUHCA, 
the Tauzin bill would eliminate vital consumer protection provisions at 
a time when utility ratepayers are still captive customers of investor-
owned electric utilities and are vulnerable to abuse from utilities 
with monopoly status over those consumers. In reality, the language in 
the stand-alone PUHCA repeal legislation is woefully inadequate to 
protect American consumers from concentrations of market power.
    The Tauzin bill and its Senate companion, S. 313, reduce the 
ability of retail regulators to exercise local regulatory control over 
complex utility organizations. We believe also that H.R. 2944 
introduced by Congressman Barton (R-TX) comes up short in providing 
meaningful market power provisions or other protections to help 
consumers in the absence of PUHCA. These measures fail to protect 
American consumers from the concentrations of market power demonstrated 
by investor-owned utilities.
    Unless and until there is retail competition in all states, PUHCA 
must remain in place. The electric industry is experiencing tremendous 
change, but effective competition is not here yet. It is vital that the 
consumer protections of PUHCA remain in place during this transitional 
period. The U.S. electric market is a ``patchwork quilt'' of varying 
degrees of regulation. Some states are almost fully competitive; other 
states are semi-competitive; while many states are regulated.
    The unprecedented merger activity of utility holding companies also 
punctuates the need to maintain consumer protections. This 
consolidation reflects an increase in potential market power over 
competitors, which leaves consumers vulnerable to anti-competitive 
behavior. Though most would agree that the modernization of PUHCA is 
appropriate, PUHCA remains a critical source of key protections for 
electricity consumers and should not be repealed.
Experience in New Orleans
    Our experience in New Orleans is illustrative of the dangers of 
PUHCA repeal at this time of rapid market change. The City Council 
regulates the retail rates of two utility operating companies, Entergy 
New Orleans, Inc. (``Entergy New Orleans'') and Entergy Louisiana, Inc. 
(``Entergy Louisiana''). Entergy New Orleans and Entergy Louisiana are 
utility subsidiaries of Entergy, a multi-state utility holding company 
registered under PUHCA. As shown in Attachment A, Entergy is an 
extremely complex holding company system. Entergy consists of the 
parent holding company and 124 direct and indirect 
subsidiaries.4 A small number of these facilities represent 
the domestic regulated utility operations. The remaining companies, 
Entergy's ``competitive'' businesses, are not subject to state or 
federal authorities--except for the restraints of PUHCA. Entergy's five 
domestic retail public utility companies provide electric service to 
approximately 2.4 million customers in the states of Arkansas, 
Mississippi, Louisiana, Tennessee and Texas, and retail gas service in 
portions of Louisiana. Entergy Mississippi, Inc., Entergy Arkansas, 
Inc., Entergy Gulf States, Inc., Entergy New Orleans and Entergy 
Louisiana comprise the system operating companies of the Entergy 
system. The system operating companies and Entergy's other subsidiaries 
together form the ``Entergy system.''
---------------------------------------------------------------------------
    \4\ Attachment A consolidates the 125 facilities into Entergy's 
material activities.
---------------------------------------------------------------------------
    The organizational structure of Entergy is already difficult to 
decipher. If Congress were to enact stand-alone PUHCA repeal 
legislation, the Council would be unable to monitor and track 
investments made by Entergy. Entergy's corporate configuration would 
become unmanageable, thus severely hindering the Council's efforts to 
protect ratepayers from RHC abuses. PUHCA requires utility holding 
companies to separate regulated and unregulated industries so that 
captive customers in New Orleans do not subsidize business ventures 
elsewhere in the United States and abroad. The SEC is to enforce 
PUHCA's primary goal, which is to make sure that captive ratepayers do 
not pay unfair prices for the goods and services they receive from 
affiliates, or otherwise cross-subsidize.
    The Council has consistently challenged proposed activities by 
Entergy which could adversely affect New Orleans'' ratepayers. For 
example, the Council recently opposed Entergy's application with the 
SEC for $750 million in additional authority to invest in unidentified 
non-utility projects. As of December 31, 1998, Entergy had invested 
approximately $1.2 billion in EWGs and FUCOs. The Council was concerned 
that the lack of specificity regarding further investments in the 
amount of $750 million by Entergy could present serious risks for the 
Entergy System, including Entergy New Orleans.
    However, despite the Council's objections, the SEC approved 
Entergy's application in a June 22, 1999 Order. The request of the 
Council and the Arkansas Public Service Commission for a full hearing 
to examine Entergy's application was denied. With the SEC's approval, 
Entergy now has carte blanche to commit to a significant level of 
undisclosed future investments. Without the continued framework of 
PUHCA, RHCs like Entergy will be able to make unchecked substantial 
foreign and non-utility investments that could put its captive 
ratepayers at risk.
    If PUHCA is repealed, state and local regulators will be virtually 
helpless to prevent or even detect harms to ratepayers from 
diversification because of the multi-state natures of RHCs and because 
these regulators have little, if any, authority to oversee transactions 
of unregulated businesses. In fact, absent PUHCA, state regulators and 
the public likely will not even find out when registered holding 
companies take on new, risky investments. Mr. Chairman, electric 
consumers in New Orleans are tired of being in the dark and they would 
not welcome further uncertainties in the absence of PUHCA.
Limitations on State Authority
    As our experience in New Orleans demonstrates, even with the 
protections of PUHCA in place, state and local regulators are hard-
pressed to keep up with the activities of registered holding companies. 
First of all, there are general limitations under the Commerce Clause 
that prevent state regulation of interstate transactions. Second, even 
the SEC has admitted that states are limited in their oversight of 
holding company transactions. In its own report that recommended the 
repeal of PUHCA, the SEC found that many states cannot address the 
problems that PUHCA addresses.5
---------------------------------------------------------------------------
    \5\ See The Regulation of Public Utility Holding Companies, 
Appendix A, Securities and Exchange Division of Investment Management, 
June 1995.
---------------------------------------------------------------------------
    The principal obstacle to review of holding company transactions by 
state regulators, however, is the Mississippi Power and Light 
doctrine.6 This doctrine was articulated in a 1988 case 
brought before the U.S. Supreme Court in which Entergy had formed a 
``nuclear'' subsidiary to own and operate a nuclear power plant. 
Entergy's ``nuclear'' subsidiary then hired Mississippi Power and 
Light, another Entergy subsidiary, to construct and operate the plant. 
The wholesale transactions between the subsidiaries were covered by a 
system-wide agreement filed with the Federal Energy Regulatory 
Commission (``FERC'').
---------------------------------------------------------------------------
    \6\ Missisippi Power and Light v. Mississippi, 487 U.S. 354 (1988).
---------------------------------------------------------------------------
    In Mississippi Power and Light, the Supreme Court held that because 
FERC had approved wholesale rates for electric power, the Supremacy 
Clause of the U.S. Constitution (Article VI, cl 2) prohibited the 
Mississippi Public Service Commission from second-guessing the FERC in 
determining whether some or all of the costs associated with the 
wholesale power sale were or were not prudently incurred. This decision 
explicitly prevents state utility commissions from exercising their own 
authority to review the components of a wholesale rate. The practical 
effect of the doctrine is to preclude state regulators from 
investigating stranded costs, cross-subsidizations and other components 
of their citizens'' wholesale rates.
    Although the Tauzin bill and its Senate companion, S. 313, give 
states and federal regulatory authorities additional access to the 
books and records of registered holding companies, the bills do not 
give the states any authority to protect consumers. For state 
regulators, access to books and records will not effectively augment 
the authority provided under current laws. Consequently, for state 
regulatory authorities, access to books and records does not fill in 
the gaps in current regulatory law, nor does it address constitutional 
restrictions on states regulating commerce among the states.
Effective Market Power Protections Are Needed to Protect Ratepayers
    The purpose of PUHCA is to prevent monopolization, cross-
subsidization and other potential market power abuses by large holding 
companies and their affiliates. Perhaps the greatest threat to 
consumers in the event of PUHCA repeal is the ability of registered 
holding companies to diversify into unregulated businesses. If PUHCA is 
repealed, RHCs will be allowed unrestricted diversification. Because of 
the multi-state character of RHCs and the lack of state authority to 
oversee transactions of unregulated businesses, state regulators will 
be virtually helpless to prevent or even detect harms to ratepayers.
    Unbridled diversification could result in a utility's investments 
going bad, with the possibility of increased capital costs absorbed by 
consumers. It also could produce deceptive financing practices, 
nondisclosure of important corporate accounts, and financial 
manipulation. Diversification also could lead to improper cost 
allocation--when unregulated subsidiaries of a utility perform services 
and undercharge for their services--with the costs being absorbed by 
ratepayers. The diversification experience of exempt holding companies 
shows that when companies diversify into businesses in which they have 
no particular expertise, they fail. Absent PUHCA, state regulators and 
the public will not even find out when RHCs take on new, risky 
investments.
    Another danger of PUHCA repeal is the potential for cross-
subsidization. The current growth in unregulated operations of RHCs, 
the industry trend toward economies of scale through centralization and 
growth of shared services, and the sharp increase in merger activity 
warrant additional, not fewer, safeguards to prevent cross-
subsidization. We already are experiencing volatility in the market, 
but cross-subsidization presents an additional motivation for market 
volatility that would not otherwise be present.
    The elimination of PUHCA without offsetting consumer protections 
will result in greater monopoly power for RHCs and higher electric 
rates for consumers. As long as there is the potential for a holding 
company to retain a major market share, protections should be in place 
to prevent market power abuses. Such protections should include:

 Repeal of the Missisippi Power and Light doctrine
 Effective ``codes of conduct''
 Effective audit authority at the state level
 Effective merger authority at the federal level
    In addition to these consumer and market power protections, it is 
critical that any elimination of the requirements in PUHCA be 
accompanied by comprehensive restructuring of the retail electric 
market. To that end, the Council commends the approach taken in 
legislation introduced by Representatives Markey (D-MA) and Largent (R-
OK). The Markey-Largent bill would continue to apply PUHCA to utilities 
operating in two or more states that are closed to competition. Other 
utilities not operating in two or more closed states would be exempt 
from PUHCA under the Markey-Largent bill. We believe that this is a 
reasonable approach to PUHCA repeal.
Monopolies on a Global Scale
    PUHCA is important not only domestically but also from a global 
perspective. The 1992 PUHCA amendments have resulted in an explosion of 
foreign investments by U.S. utilities. As international investments by 
holding companies continue, Congress must work to ensure that the 
utilities'' ratepayers are protected and that the utilities bear the 
risks for these investments.
    A number of holding companies have already experienced financial 
setbacks in their foreign investments. For example, CalEnergy Company 
took a one-time charge of $87 million in the fourth quarter of last 
year after its $500 million investment in three 400-megawatt power 
projects in Indonesia was suspended due to the Asian financial crisis. 
Edison International also was adversely affected by Asia's financial 
problems. Not only did it suffer heavy losses, the company was forced 
to investigate charges of corruption and excessive electricity tariffs 
levied against its $2.5 billion power project in Indonesia.
    Despite losses in foreign markets, some U.S. utilities are 
continuing to expand their global investments. Recently, AES Corp. 
announced that it will pay $155 million to acquire a controlling 
interest in a Brazilian telecommunications group--even though AES 
reported a cumulative write off of $146 million on its Brazilian 
business for the first half of 1999 due to a sudden devaluation of 
Brazil's currency in late 1998 that resulted in major losses for AES.
    Additionally, Southern Company filed a request with the SEC in 
January for authorization to spend another $4 billion or up to 175% of 
retained earnings to invest in foreign and domestic non-regulated 
businesses over the next five years. Southern seeks this additional 
authorization despite its acknowledgment that its non-regulated units 
had shown poor net earnings to date--mostly due to a $111 million U.K. 
windfall tax charge in 1997 and a $200 million write-off on South 
American assets in 1998. Southern also recently declared bankruptcy for 
a project in Mobile, Alabama. To date, Southern has spent approximately 
$3.5 billion on non-regulated ventures and has used almost 75% of its 
existing authorization.
    Southern has already substantially diversified its portfolio. Some 
pending Southern projects include:

 $300 million investment in Thailand;
 a share in a $500 million project in Shanxi Province, China;
 a bid for up to $400 million in Cajun Electric Power 
        Cooperative assets in Louisiana;
 a greenfield plant in Australia;
 a new plant in Wisconsin;
 a plant acquisition in Texas; and
 asset purchase deals in New York and California valued at 
        $1.28 billion.
    As more RHCs seek to diversify through foreign and non-utility 
investments, Congress must ensure that ratepayers do not bear the risks 
of these ventures. The stand-alone repeal of PUHCA will release RHCs 
from federal regulation and expose ratepayers to undue risk that is 
best borne by the utility shareholders.
PUHCA Repeal at a Time of Uncertainty Could Prevent the Benefits of 
        Competition from Being Realized
    The proponents of stand-alone PUHCA repeal contend that repealing 
PUHCA is a pro-competitive step that would eliminate barriers to 
competition and to state restructuring efforts. In reality, stand-alone 
PUHCA repeal would be a major setback for competition and ultimately 
would harm rather than benefit customers. Abandoning the protections in 
PUHCA at the nascent stages of competition would empower large holding 
companies by allowing them to consolidate a firm share of the market. 
If industry consolidates in this manner, it is questionable whether 
competition would be possible at all.
    While not perfect, the significant costs to consumers from the 
repeal of PUHCA would far outweigh the regulatory benefits of 
abandoning PUHCA. Stand-alone PUHCA repeal would be detrimental to 
electricity consumers nationwide. Attachment B is a comparison chart of 
the benefits for consumers versus registered holding companies if PUHCA 
is repealed on a stand-alone basis. As the chart shows, consumers will 
lose if PUHCA's requirements are eliminated.
    The Council opposes stand-alone repeal of PUHCA. While we agree 
that some of the requirements in PUHCA need reform, we believe that 
PUHCA's core protections are necessary unless and until we have a fully 
competitive electricity market.
    Thank you, and I would be happy to answer any questions at this 
time.
[GRAPHIC] [TIFF OMITTED] T0358.013

[GRAPHIC] [TIFF OMITTED] T0358.014

[GRAPHIC] [TIFF OMITTED] T0358.015

    Mr. Oxley. Thank you, Ms. Quirk.
    Let me begin. It has been my observation that a lot of the 
folks who oppose PUHCA repeal are many of the same folks who 
opposed natural gas deregulation and predicted that the world 
would come to an end, that prices would be controlled by 
monopolies and oligopolies, and that people would pay more for 
natural gas, and it has been the opposite.
    Where were you on that debate, Ms. Quirk and Mr. Kanner?
    Ms. Quirk. I was in law school at the time.
    Mr. Oxley. Did you have an opinion on same?
    Ms. Quirk. I was probably thinking more toward exams than 
deregulation.
    Mr. Oxley. Mr. Kanner?
    Mr. Kanner. The members of Consumers for Fair Competition 
are strong proponents of competition. We want to see electric 
restructuring legislation passed. We just want to make sure 
that it meets its ideals of creating competition.
    Mr. Oxley. Were you in law school?
    Mr. Kanner. I was not active in the natural gas 
deregulation debate, but I would note that on the natural gas 
side, pipelines, the equivalent of electric transmission lines, 
are open for all uses under the same comparable tariff. We 
don't have that today on the electric side. This knot 
accomplished in the Barton bill, that is one of the things that 
we need.
    Mr. Oxley. Let me ask Ms. Heaton, do you believe FERC and 
the State regulators are currently denied access to necessary 
books and records?
    Ms. Heaton. Mr. Chairman, I think they can get access to 
whatever they deem appropriate to fill their jurisdictional 
responsibilities.
    Mr. Oxley. That has been your experience with Columbia?
    Ms. Heaton. Yes.
    Mr. Oxley. Mr. Lhota?
    Mr. Lhota. Yes.
    Mr. Oxley. Ms. Heaton, why do you prefer an objective 
rather than a subjective ``deems relevant'' standard for access 
to books and records? Setting aside the issue of sunsetting, 
what would you see as preferable language on books and records?
    Ms. Heaton. I would be interested in submitting specific 
legislative language to you on that issue.
    The reason for objective as opposed to subjective is that 
at Columbia, as well as most other companies, we view our 
relationships with our regulators as one of our primary assets 
and take very seriously maintaining a positive relationship.
    When there are subjective standards, you are more likely to 
have disagreements. We view it as a losing situation to have to 
be, A, arguing with the regulators, or, worse case yet, suing 
them. So we prefer to have a clear understanding set by 
Congress as to what books and records could be obtained and 
would be off the table so we could go forward and deal with 
those regulatory constraints appropriately.
    Mr. Oxley. Mr. Lhota, do you have an opinion on that?
    Mr. Lhota. We would support their position, but we are not 
locked into the objective standard.
    Mr. Oxley. Let me ask you, does NARUC support stand-alone 
PUHCA repeal?
    Mr. Lhota. I would not hazard to speak for NARUC.
    Mr. Oxley. In 1992, Congress amended PUHCA to allow foreign 
investments and exempt wholesale generators. In 1996, Congress 
exempted telecommunications companies in the Telecommunications 
Act.
    In both cases Congress created--by the way, both from this 
committee, in both cases Congress created certain conditions on 
those exceptions intended to protect consumers. Are those 
provisions contained or repealed in the legislation that you 
are advancing, Mr. Lhota?
    Mr. Lhota. Yes. It repeals the--PUHCA as it now exists and 
replaces it with the books and records. So the answer is yes.
    Mr. Oxley. In your testimony you represent PUHCA as a 
nonutility or rate regulation statute, which I agree with. Do 
you mean to assert that PUHCA plays no role in mitigating 
market power, preempting abusive practice directed against the 
captive retail market or generally facilitating effective 
regulation? Does stand-alone PUHCA repeal strip consumers and 
competitors of structural protections?
    Mr. Lhota. Since that was a long question, let me reply to 
what I think I heard, Mr. Chairman.
    One point I would make is that what PUHCA does is that it 
is not a rate-making statute. It has an integration standard, a 
books and records provision, a lines of business provision in 
issuance of securities. That is the issues that PUHCA deals 
with.
    Relative to market power, that is an issue that FERC would 
address, and in some regards I would argue that PUHCA could 
actually enhance market power by encouraging mergers and 
acquisitions in contiguous geographical areas instead of 
permitting diverse mergers or acquisitions in remote 
geographical areas.
    Now, I am not sure that I answered your question, but I 
think that is what I heard.
    Mr. Oxley. The Chair's time has expired. I recognize the 
gentleman from New York.
    Mr. Towns. Let me ask you, Ms. Heaton, your testimony calls 
for a sunset date for both the FERC and State access to books 
and records provisions. At the bottom of page 4 of your 
statement, you say that if PUHCA is repealed through 
comprehensive legislation designed to encourage utility 
competition, the affiliate oversight and access to books and 
records provisions now contained in 2944 are simply 
unnecessary. The competitive forces unleashed through such 
measures should be more than adequate to substitute for 
additional regulation to guard against abuses.
    Please explain why you believe that affiliate oversight 
would be necessary, and please be as specific as possible.
    Ms. Heaton. Yes, sir.
    The Roundtable Group believes that the best consumer 
protection that could ever exist is vigorous competition. 
Comprehensive restructuring legislation would unleash 
competitive forces that at this point are still bound up 
through a myriad of regulatory schemes. The Roundtable Group 
could go either way on the issue of comprehensive legislation 
versus stand-alone PUHCA repeal. There is a general consensus 
that PUHCA ought to be repealed, and our view is that it ought 
to happen sooner rather than later. If that would be part of a 
comprehensive bill, that would be terrific, but if it could 
only be done through a stand-alone, that is fine.
    In terms of protection for affiliate abuses, again FERC and 
the States will continue to have jurisdiction over their 
appropriate scope of authority, primarily on the retail side 
for the States and the wholesale side for the FERC. They can 
get access to whatever books and records in that scope that 
they need as well as transactions that they deem to be relevant 
to setting either the rates or the protecting of the consumers. 
To that extent additional books and records authority would not 
be necessary.
    Mr. Towns. Mr. Lhota, do you agree with that, and if so, 
why?
    Mr. Lhota. We fully support competition because I think 
competition is a great market discipliner, and the examples 
that I use in my speeches are restaurants in large communities. 
If they are not competitive and top quality, they go out of 
business.
    We are not proposing the sunsetting from our coalition. We 
would not oppose it, but we are not--we would not oppose it if 
it were in. We are not proposing that it be included.
    Mr. Towns. Say that again.
    Mr. Lhota. In our repeal provisions for PUHCA, we are not 
proposing a sunset provision on the books and records part.
    Mr. Towns. So----
    Mr. Lhota. We would not oppose it if it were in there, but 
we are not proposing it.
    Mr. Towns. As my son would say, any way that the wind blows 
is cool with you?
    Mr. Lhota. No, I wouldn't go quite that far.
    Mr. Towns. Thank you very much.
    Mr. Kanner.
    Mr. Kanner. Mr. Towns, let me emphasize the need for 
continued access to books and records. It is the fact that the 
utility would remain in a monopoly enterprise, not subject to 
the winds of competition. If Office Depot wants to have a loss 
leader and subsidize the cost of staples and make up the 
revenues on staplers, they are free to do that, but you as a 
consumer can say, I am going to buy that loss leader from 
Office Depot, but I am going somewhere else to buy the other 
office supplies because I can get a better deal.
    In the electric industry, you have to get the distribution 
function from your local monopoly utility. So if they are 
subsidizing their competitive ventures with captive customer 
revenues, that customer doesn't have the choice of going 
elsewhere. That is why we need the ability for regulators to 
review all of the relevant information, to be able to audit 
their activities, to have codes of conduct, to make sure that 
utilities don't subsidize their competitive ventures with their 
monopoly functions.
    Mr. Towns. Thank you very much.
    Ms. Quirk.
    Ms. Quirk. If I can just add to Mr. Kanner's statement. One 
other relevant fact when you talk about affiliate abuses and 
State regulatory authority is that most States are like New 
Orleans in that their access to books and records only extends 
to the boundaries of New Orleans. So in the absence of the 
books and records authority currently in Mr. Tauzin's bill and 
Mr. Barton's bill, there is no extension of the authority of 
the State regulators beyond the boundaries of their 
jurisdiction, and that is a huge problem because the 
overwhelming likelihood is that affiliate transactions will 
take place beyond the boundaries of that jurisdiction.
    Mr. Towns. Thank you very much, Mr. Chairman. I yield back 
the balance of my time.
    Mr. Oxley. In a perfect world--let me ask you this. In a 
perfect world, if we were to deal with PUHCA reform and PUHCA 
repeal, would it not be in the best interests of everybody to 
do it in the context of a restructuring bill? Let me begin with 
Ms. Heaton.
    Ms. Heaton. I have not checked these views with the 
Roundtable Group, but I will give you a personal opinion, which 
is no. I think there are so many open questions on the question 
of what should be in a comprehensive bill, yet it is so clear 
that PUHCA is continuing to have negative effects today, that 
consumers would be better off if PUHCA were to be repealed 
immediately with comprehensive legislation to follow.
    Mr. Oxley. Mr. Lhota?
    Mr. Lhota. Our answer would be no as well, Mr. Chairman. I 
have been with American Electric Power for 35 years. I have 
lived under the PUHCA act for 35 years, and I think the 
constraints that it imposes on our company is a detriment to 
the consumers and the ratepayers. We would propose that it be 
done immediately.
    Mr. Oxley. Mr. Kanner?
    Mr. Kanner. My answer is absolutely yes, Mr. Chairman. Let 
me give you an example of why. In 1992, when Congress passed 
Energy Policy Act, EPACT, and had the limited exemption from 
PUHCA for exempt wholesale generators, it allowed utilities to 
convert what are regulated cost-of-service-rate-based 
generating plants to competitive wholesale generators provided 
that all of the relevant State commissions approved that 
conversion. That provision would be repealed by stand-alone 
PUHCA repeal. So that State commission would no longer have 
authority over whether that rate-based plant is suddenly taken 
away from the customers it was intended to serve and is now a 
competitive plant.
    If we don't have other provisions in a comprehensive bill 
that looks at the generation market and whether it is a 
competitive market or not, that is a double whammy on consumers 
and something that I don't think we should stand for.
    Mr. Chairman, I would agree with your question. It should 
only be done in the context of a comprehensive bill and a 
comprehensive bill that creates a competitive market structure.
    Mr. Oxley. Before I go to Ms. Quirk, let me ask both of the 
industry folks to respond to Mr. Kanner.
    Ms. Heaton. I am puzzled by Mr. Kanner's example. In that 
circumstance, I have not heard any change about the obligation 
to serve that the utility would continue to have. Moreover, 
nothing that Congress is talking about would change the State's 
rate-making ability for setting the rates for consumers.
    So you would have a utility that moved a cost-of-service 
plant into a competitive plant. It continues to have to serve 
its captive ratepayers at a cost that has already been set by 
the State with a mandatory obligation to serve. Consumers have 
the same rates, and possibly over time declining rates, while 
the utility could use that plant in a more efficient manner. I 
am not seeing the downside to that example.
    Mr. Kanner. If it was a low-cost plant that was on average 
the lowest-cost resource that that utility has, and it is 
converted into competitive market, the difference between its 
costs and its market are captured by the utility. Yes, the 
utility has the obligation to serve. Let's say that it now buys 
at the market. It is paying the market rate, and under cost of 
service regulation, the utility's customers would be paying the 
cost which is now that market rate rather than the cost of 
production from that low-cost plant.
    Ms. Heaton. The rates for the consumers wouldn't change 
unless the State allowed those rates to change.
    Mr. Kanner. They would have to change if the costs changed.
    Ms. Heaton. That is not true. There are lots of costs 
incurred by utilities that the State regulators don't allow to 
be passed on to consumers because there is a prudence review. 
If there were to be a concern along the lines Mr. Kanner is 
suggesting, then the State could simply say, we are not going 
to allow you to raise your rates.
    Certainly a utility going into this would have to recognize 
the likelihood that if they were to convert a plant from a 
cost-of-service to a competitive system, that the likelihood of 
them getting an increase in rates is about nil.
    Mr. Lhota. I would agree. There is an obligation to serve, 
and there is rate regulation at the State level. I would agree 
with Ms. Heaton that the regulators would certainly look at 
this, in my view.
    Mr. Kanner. If the regulators would look at it, then I 
don't think that there is any problem with having the 
regulators continue to look at it before the asset is sold.
    Mr. Oxley. Ms. Quirk, do you want to get into this mud 
wrestling match?
    Ms. Quirk. I will jump in because I feel a little left out 
and lonely.
    Mr. Oxley. It is a tag team.
    Ms. Quirk. I am going to weigh in on Marty's side on this.
    I think there is some question about the authority of State 
regulators to conduct such things as prudence reviews when it 
comes to something like flow-through of purchase power 
expenses. Remember in the example that Marty gave, what we are 
talking about is a purchase power expense in the context of a 
jurisdiction that has not gone to retail choice, so it is a 
cost-based rate.
    Under the Mississippi Power & Light case, which I 
discussed, there have been limitations placed on the extent to 
which a State can look at the prudence of acquisitions of power 
supplies. So in that instance I think there are some real 
questions about whether State regulators would have the 
authority to address this abuse.
    Mr. Oxley. Well, we have had a lively discussion and 
excellent testimony from all of you. We most appreciate it for 
all of you to come to the subcommittee with your presence and 
your testimony. The subcommittee stands adjourned.
    [Whereupon, at 12:03 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
                                                   October 20, 1999
The Honorable Mike Oxley
Chairman
Subcommittee on Finance and Hazardous Materials
2233 Rayburn House Office Building
Washington, DC 20515
    Dear Mr. Chairman, I want to commend you for holding a hearing on 
repeal of the Public Utilities Holding Company Act (PUHCA) on Thursday, 
October 7.
    The Interstate Natural Gas Association of America (INGAA) has long 
supported repeal of PUHCA. INGAA believes that PUHCA is a barrier to 
competition. Some natural gas pipelines are registered under PUHCA, 
some are currently exempt and others currently do not fall under the 
authority of PUHCA. But our industry has been and continues to change 
and evolve. All of our members are seeking new business opportunities. 
As each of our member companies seeks opportunities to grow, they are 
examining the impact of PUHCA on their businesses. No business except 
the natural gas and electric utilities industries has to be concerned 
about this act affecting their business plans.
    PUHCA does not give authority over rates. It was not established to 
protect the consumer. It was enacted to protect investors. Other laws 
have been passed to meet this need. These laws have enabled the SEC to 
enhance its regulation of all issuers of securities, including public 
utility holding companies. State regulation has expanded and 
strengthened since 1935. Also, institutional investors such as pension 
funds have become more sophisticated and are continuously demanding 
more detailed information from all issuers of securities.
    INGAA strongly supports early and direct repeal of PUHCA. However, 
we do not support the request for authority for FERC and states to 
obtain additional access to books and records of PUHCA companies such 
as that found in S. 313 and H.R. 2363. INGAA agrees that FERC and the 
states should have access to the books and records relating to any 
transactions between a public utility or a natural gas company and its 
affiliates. However, FERC and the states already have this authority. 
We are not aware of any instance where either FERC or the states failed 
to obtain necessary books and records.
    I am enclosing a paper explaining our concerns about unfair 
competition when the books and records of regulated companies are 
opened to competitors. INGAA is concerned that the language in the 
PUHCA bills introduced to date can handicap these U.S. companies for 
competitive purposes. I would appreciate having this letter and 
attachment included in your record of October 7.
            Sincerely,
                                                Jerald V. Halvorsen
Enc.
  new investigative powers over books and records of utility holding 
 companies are not needed in the puhca repeal title of a comprehensive 
                      electric restructuring bill
    The Interstate Natural Gas Association of America (INGAA) strongly 
believes that any electric restructuring legislation must include 
repeal of the Public Utility Holding Company Act of 1935 (PUHCA). Both 
S. 313 and H.R. 2363 were originally drafted three years ago as 
``stand-alone'' legislation repealing PUHCA. Since then, support for 
this stand-alone approach seems to have waned, despite wide support for 
the concept of PUHCA repeal, and its routine inclusion in new 
comprehensive bills. It now seems clear that Congress wants to repeal 
PUHCA as part of a comprehensive electricity restructuring measure.
    In the same three years, 23 states representing over half the U.S. 
population have enacted detailed new gas and electric utility 
competition laws. Even more states--after lengthy proceedings--have 
approved a number of significant utility restructurings as well as rate 
cuts, and presided over a wave of electric generation divestitures that 
have reshaped the U.S. utility industries.
    These changed circumstances require a fresh look at the broad, 
permanent, federally created investigative authority S. 313 and H.R. 
2363 grants to the Federal Energy Regulatory Commission (FERC) and the 
states, to examine the books and records of some but not all 
competitors in the new gas and electric industries. In fact, LNGAA 
believes that the books and records language set forth in Sections 5 
and 6 is both unnecessary and inappropriate for the following reasons:

(1) the FERC and states already have sufficient jurisdiction to reach 
        all of the relevant books and records of a utility and its 
        affiliates;
(2) the repeal of PUHCA, in and of itself, will expand FERC and state 
        regulatory authority by removing the preemption barrier;
(3) the lack of either a meaningful standard of relevance or even 
        modest procedural safeguards give rise to the possibility that 
        Section 5 or 6 may result in ``fishing expeditions'' or the 
        unwarranted disclosure of confidential information;
(4) these sections may force the anticompetitive disclosure of some 
        firms' private business strategies to their competitors who may 
        have intervened in rate cases simply to obtain access to this 
        information;
(5) Sections 5 and 6 contradict one of the main purposes of PUHCA 
        repeal--increasing competition through the creation of a level 
        playing field in the utility industry--by catching only some 
        competitors, and are, therefore, discriminatory;
(6) Section 6 wrongly assumes the states ``need help'' from the U.S. 
        Congress, because they cannot actively legislate ``on their 
        own,'' or effectively investigate the books and records of 
        multi-state utilities.
    (1a) FERC can already reach all books relevant to the utility and 
does not need any new ``books and records'' authority under Section 5 
of S. 313 and H.R. 2363. FERC's existing powers have been effective 
enough to completely restructure the U.S. gas industry in the 1980s and 
1990s and the U.S. electric wholesale industry in the 1990s. Many 
sections of the Natural Gas Act (NGA) give FERC power to collect data, 
but the broadest is Section 14(c) and (d). Under it, FERC can force 
``any person'' to produce, from ``any place'' in the U.S., ``any books, 
papers, correspondence, memoranda, contracts. agreements, or other 
records which the Commission finds relevant or material'' to ``any 
investigation or other proceeding'' under the NGA. Language almost 
identical to this, requiring the production ``from any place'' in the 
U.S., of ``any books,'' papers, correspondence, etc., of ``any 
person,'' is also set forth in section 30 1(b) and (c) of the Federal 
Power Act (FPA). FERC can reach any cost at issue in a gas or power 
rate case before it. More is unnecessary.
    (1b) All states already can reach all relevant utility and 
affiliate books under state law, and do not need any new ``books and 
records'' authority under Section 6 of S. 313 and H.R. 2363: Ever since 
its landmark 1945 International Shoe ruling, the Supreme Court has 
interpreted the U.S. Constitution to give all states jurisdiction over 
both in-state utilities, and their out-of-state affiliates that even 
``minimally'' affect in-state utility rates. In the last 55 years, 
states repeatedly have enacted such ``long arm'' laws to catch out-of-
state firms. Maryland's utility law, for example, reaches ``to the full 
extent'' allowed by the U.S. Constitution. The Massachusetts law covers 
``all relations, transactions, and dealings, direct or indirect,'' 
between a utility and its affiliates, and is now reaching even 
documents in England relevant to the National Grid Group's (NGG) merger 
with the New England Electric System (NEES). The investigative long 
arms of the Oregon PUC and the Utah PSC, also intercontinental, have 
collected thousands of documents from Scotland, that are relevant to 
the PacifiCorp merger. And the Florida PSC can ``exercise all judicial 
powers and ``do all things'' to effect its jurisdiction over utilities.
    (1c) The Federal Power Act, in Section Sec. 201(g), also gives 
states ``books and records'' power over utilities and affiliates with 
whom they transact business: With this clear, federally granted 
investigative control over the in-state utility, a state PUC already 
can reach all the utility's direct transactions and dealings with its 
out-of-state affiliates. As FERC recognizes in its affiliate rules, 
these direct utility-affiliate transactions are the only ones that can 
unfairly hike costs to captive in-state consumers; these transactions 
are already caught by Sec. 201(g); and no showing of this provision's 
inadequacy has been made.
    (2) Simple PUHCA repeal--by itself, without any extra new state 
investigative powers--would enlarge current FERC and state authority 
over affiliate transactions of registered holding companies: Under the 
1992 Ohio Power case, both the FERC and the states are preempted from 
reviewing and disallowing costly transactions among the different 
affiliates of a registered holding company, if the SEC already has 
approved these deals under PUHCA. Thus, in the Ohio Power case, the SEC 
approved a ``cost-of-service'' rate for the utility's long-term coal 
contract with its affiliate; and when FERC later tried to set a lower 
``market rate'' for the same deal, it couldn't. Simple repeal of PUHCA 
would end this FERC and state preemptive effect, and thus expand FERC 
and state authority over affiliate transactions of these registered 
companies--back to the point where it was in 1992, before the Ohio 
Power case. In sum, the simple repeal of PUHCA by itself significantly 
boosts FERC and state authority over utility affiliates.
    (3) No express protections for recipients of unreasonable state 
data requests: Other federally created investigative powers--like those 
used by the Justice Department in antitrust investigations, under 15 
USC Sec. 1311 et seq.--give affected companies the right to raise, in 
advance, a variety of objections to unwarranted, unreasonable, or 
irrelevant demands that may violate the Fourth or Fifth Amendments. 
Sections 5 and 6 of S. 313 and H.R. 2363 do not.
    (4) Anticompetitive disclosure of business strategies may result 
from federal or state ``fishing expeditions:'' A company's confidential 
customer data and business plans--gained by the FERC or a state PUC 
under Sections 5 or 6--can be subject to intervenor disclosure, and in 
some states to public disclosure, in rate and certificate cases that 
use the data. For the company 5 competitors, who often intervene in 
these cases, this means an illicit windfall of data on their opponent's 
future plans. This hurts competition, and ultimately hurts consumer 
choice by stifling competition.
    (5) New books and records powers in S. 313 discriminatorily cover 
only some competitors: Sections 5 and 6 of S. 313 and H.R. 2363 subject 
only gas and electric ``utility holding companies'' to the new federal 
and state investigative tools. Thus registered and exempt holding 
companies, such as Columbia and Enron, are covered by it; but multi-
state utilities with different corporate structures, such as PacifiCorp 
and Utilicorp, aren't. Many other kinds of companies are also 
exempted--such as Qualified Facilities (QFs), Electric Wholesale 
Generators (EWGs), Foreign Utility Companies (FUCOs), munis and coops--
even though they may be full-fledged competitors in the new gas and 
power industries. Other exempted entities include the PMAs, Salt River, 
and TVA--despite their huge market power in many states. This 
discrimination imposes costs upon affiliates of ``utility holding 
companies'' that their competitors do not have to bear. Many of these 
affiliates already face tight margins, and, therefore, such additional 
costs may eliminate a significant number of affiliate businesses.
    (6) The massive restructuring of electric utilities in 24 states 
since 1996 reflects strong state fact-finding powers: The 
sophisticated, detailed rewriting of utility laws and rules in these 
states, beginning with New Hampshire's law in May, 1996, is part of the 
biggest change in the utility industry in decades. It could not have 
been successfully led by uninformed PUCs with inadequate fact-finding 
powers. Many of these 24 new state laws exceed 100 pages in length. 
Such detailed drafting makes it is difficult to believe that the PUCs 
and state legislators who drafted these laws failed to provide 
regulators with sufficient investigative powers to assure that these 
laws are carried out.
    Conclusion: Congress must repeal the 1935 Act soon. It should end 
this impediment to competition, to let the nation's 100-plus holding 
companies enter new markets and compete on a level playing field with 
new entrants as well as companies not now subject to PUHCA. Congress 
does need to clarify the states' powers in the new unbundled energy 
markets. But states do not need to and, therefore, Congress should not 
prescribe the new ``books and records'' powers for FERC and the states 
as is currently proposed in Sections 5 and 6 of S. 313 and H.R. 2363. 
FERC and the states already have sufficiently broad authority to obtain 
all relevant books from both natural gas companies and electric 
utilities.
                                 ______
                                 
      Prepared Statement of National Alliance for Fair Competition
    The National Alliance For Fair Competition (NAFC) is a coalition of 
ten national trade associations representing over 35,000 small 
businesses throughout the United States.
    These organizations consist of small, private sector businesses 
engaged in the design, supply, rental, sale, design, installation and 
servicing of electrical and mechanical products, equipment, and 
systems, as well as providing energy fuels. These firms operate in 
residential, commercial and industrial markets. While a few larger 
firms are included within this group, the majority of business are 
small by any standard of measurement and many are family owned and 
operated. The organizations themselves are independent entities but 
share common goals and, in some cases, individual members.
    The 35,000 firms encompassed within NAFC are only a fraction of the 
overall number of businesses which make up the affected industry. The 
Department of Commerce puts the approximate size of the contractor 
groups alone at 144,000 individual firms. These firms employ over 1.3 
million workers, with an annual payroll of $31 billion. NAFC's 
construction member firms add a total value to domestic GNP of over 
$100 billion on an annual basis, according to the US Commerce 
Department.
Introduction
    Proponents of the repeal of the Public Utility Holding Company Act 
(PUHCA) have frequently portrayed their effort as one which of concern 
only to the few registered companies to which the Act directly applies; 
that repeal is needed to allow them to compete more efficiently; and, 
that they are unduly restrained in their ability to enter new lines of 
business or to compete in states outside their home territory.
    NAFC and the thousands of small businesses which are being impacted 
today by the expansion of utility-owned affiliates, many of which exist 
in holding company settings, believe otherwise.
    The existence of the protections contained in PUHCA, including 
restrictions on cross-subsidization, the requirement of separation of 
regulated and unregulated businesses, the restrictions on intrasystem 
loans and financing, the requirement of prior approval for 
diversification and the restrictions on type of diversification are as 
necessary now as when the Act was created.
    As was the case in the early decades of this century, the electric 
utility industry is undergoing enormous change. Mergers and 
consolidation in the industry have reached and now exceed any previous 
recorded pace. Once again, the very situations which gave rise to the 
necessity of creating PUHCA, especially the problems of cross-
subsidization and affiliate abuses, are threatening substantial harm to 
consumers and, in the present instance, competition as well.
    The climate of deregulation, if not its actual occurrence, has 
prompted utilities to form unregulated affiliates and subsidiaries 
seeking to capture markets which have not traditionally been served by 
utilities and which lie, generally, outside the scope of their core 
functions. Increasingly, utilities have settled on entry into the 
energy services and related markets as a means of holding on to 
customers and establishing profit centers. Thus, utilities now seek to 
dominate the related energy services markets, such as those for 
electrical, HVAC,/R and air conditioning markets.
    This diversification by utilities into areas outside of their 
publicly regulated role as producers and suppliers of energy has 
occasioned significant and continuing harm to small, private sector 
firms engaged in the related energy service fields. Utilities 
(typically through unregulated affiliates or subsidiaries) now 
routinely sell appliances, provide plumbing, heating, and cooling 
equipment and service contracts, engage in insulation work and sales of 
storm windows and doors, provide outdoor lighting and interior lighting 
fixtures. Utilities have also begun to enter into security and alarm 
monitoring markets, telecommunications, and related energy markets such 
as energy management and energy monitoring.
    Most importantly, utilities are unfairly subsidizing their market 
entry from their utility rate base and using their powers as an 
incumbent monopoly to discriminate against non-affiliated competitors. 
There is considerable potential for small businesses to be harmed in 
their traditional markets and to be denied access to newly emerging 
markets which are the key to future expansion, job growth, and 
profitability as deregulation progresses.
PUHCA and Small Business
    Despite the fact that the Public Utility Holding Company Act 
(PUHCA) directly applies only 16 utility holding companies and may, 
therefor, be viewed as only of minimal importance to small businesses; 
PUHCA repeal does have considerable significance for these small 
businesses.
    First, it's a mistake to believe that PUHCA impacts only a few, 
large multi-state utility operations. By its very existence, PUHCA 
impacts far more utilities which must operate and structure themselves 
in a fashion so as not to become subject to the Act's provisions. 
Indeed, this is one of the major safeguards of the 1935 Act: it serves 
as a brake on the unrestricted expansion and diversification of other 
utilities. If PUHCA were repealed, not only the 16 registered holding 
companies but every other utility would be free to acquire widely 
dispersed utility affiliate operations and engage in multistate 
activities which give rise to the very kind of abuses which PUHCA was 
designed to prevent.
    Second, without the restraints imposed by PUHCA, public utility 
holding companies would have the potential to expand further and to 
develop and exploit monopoly markets beyond the control of any one 
state. Indeed, without the restraint imposed by the Act, a multiplicity 
of mergers and acquisitions, already taking place, will result in even 
more multi-state utility operations which, but for repeal, would have 
been subject to SEC jurisdiction and scrutiny. If PUHCA were repealed, 
the presently exempt holding companies would no longer have to confine 
their operations primarily to a single state. State commissions could 
then lose control over the out of state operations of utility holding 
companies (both the presently registered ones as well as those 
presently exempt which choose to expand) which would then be free to 
engage in unconditional interstate commerce and foreign acquisitions.
    Third, and more importantly for small business competitors, repeal 
of PUHCA will bring with it the ability of public utility holding 
companies to further diversify into unregulated further eroding those 
markets traditionally served by small business and creating barriers to 
entry in new markets. State regulators will be powerless to prevent 
harm to these firms because of the multistate character of public 
utility holding companies and because state regulators have little 
authority to oversee the transactions of the unregulated business. More 
specifically, both ratepayers and small business competitors suffer 
from the performance of services by utility subsidiaries for the 
unregulated subsidiaries (such as ESCOs) without charging properly, if 
at all, which results in the costs of the unregulated business being 
borne by ratepayers and conferring an unfair competitive advantage upon 
the unregulated subsidiary.
Specific PUHCA Protections And Pending Legislation
    Intrasystem Financing. The Security and Exchange Commissions's 
(SEC) Rule 45(a), promulgated pursuant to the authority of section 
12(b) of PUHCA, provides that a company in a registered holding company 
system must file a declaration and receive an order from the SEC before 
it may lend or extend credit to, indemnify, or make any donation or 
capital contribution to any company in the system. This extends 
coverage to public utility companies which may disadvantage competition 
by the using the credit of the utility to borrow money on behalf of 
affiliate operations competing directly against small businesses for 
customers and markets. Such favorable borrowing not only can impair the 
future rating of the utility, but amounts to a cross-subsidy to the 
unregulated affiliate.
    Regulators may encounter significant difficulty in distinguishing 
whether the borrowing was done to benefit the utility operation and its 
consumers or was done to benefit the unregulated operation competing 
against non-affiliated private sector firms. The holding company may be 
able to use its utility operations to raise funds for unregulated 
ventures in other markets by borrowing against the assets of its 
regulated utility operations. If the risks inherent in the regulated 
market are lower than those in the unregulated, competitive market (as 
can be anticipated) cross-subsidies result in the form of lower cost 
debt for the competitive venture than would otherwise be the case. 
Consumers will suffer, as well, since the because the regulated utility 
operation now bears some of the risks associated with the capital 
supplied for the unregulated business. The prevention of this expanded 
risk, the commensurate higher rates to be paid by consumers to defray 
such loans, and the adverse impact on competition in unregulated 
markets are the very reasons why PUHCA protections must be continued.
    Unfortunately, the present legislation regarding PUHCA repeal does 
not require holding companies to exclusively use non-recourse debt, 
preclude inter-affiliate loans, or otherwise insulate captive consumers 
from risky financial transactions.
    Affiliate Transactions. Section 13 of the Holding Company Act 
governs service, sales and construction contracts among affiliates. In 
general, section 13(a) prohibits registered holding companies from 
entering into or performing any such contract with an associate utility 
or mutual service company, except in limited circumstances to be 
exempted by rule. Section 13(b) permits registered holding company 
subsidiaries and mutual service companies to enter into or perform a 
service, sales or construction contract with an associate company only 
in accordance with SEC rules and only if such contract is performed 
``economically and efficiently'', for the benefit of the companies 
serviced, at cost, fairly and equitably allocated among such companies.
    On of the more pernicious aspects of unfair competition is the 
shifting of costs from the unregulated affiliate to the regulated 
utility operations. This harms both ratepayers and competition in the 
affected competitive market. One of the major purposes of PUHCA was to 
prevent this cost shifting.
    In connection with monitoring operations of service companies, the 
SEC has identified and corrected such abuses. The SEC has been 
particularly concerned with the practice of shifting holding company 
expenses to operating utilities through the medium of a service 
company. This shifting was accomplished, for example, by sharing 
officers and employees between the holding company and the service 
company and charging some portion of their compensation to the utility 
customers of the service company. In a series of proceedings, the SEC 
established the principle that the compensation and expenses of holding 
company personnel must be borne by the holding company and not shared 
with an associated service company and passed on to utilities
    Unfortunately, this precise situation--the sharing of officers and 
employees--is again becoming an issue as utilities expand into 
unregulated markets. At the instance of public utilities, a number of 
states now permit such sharing despite the recognized potential for 
consumer and competitive abuse. For example, New Jersey has passed a 
statute which specifically permits its utilities to share 
administrative personnel, employees, administrative services, and 
facilities with unregulated, non-utility ventures. The statute 
specifically allows a utility company's unregulated businesses to use 
utility employees to service non-residential accounts. Other states 
have similar provisions, including Illinois, and Massachusetts while 
some states, such as Nevada, expressly prohibit the practice. If PUHCA 
should be repealed without establishing new provisions which, at a 
minimum, continue the protections contained in the statute now, the 
practice of sharing employees can be expected to expand greatly with 
attendant increases in cost shifting and cross subsidization.
    In addition, the SEC has recognized that even the present language 
of PUHCA may be inadequate to deal with an increasingly common 
situation where the utility itself is the provider of non-tariffed 
services or goods to its affiliates or non-associated entities. In it's 
1995 Report to the Congress, it SEC's Division of Investment Management 
stated:
        ``[increased diversification may raise new and different 
        affiliate concerns.]. A new standard of review for transactions 
        between utility and nonutility associate companies may also be 
        appropriate where the utility is the seller of goods or the 
        service provider . . . Finally, the ``cost'' standard of 
        section 13 may not be the correct standard for reviewing 
        affiliate transactions; it may make more sense to use market 
        value, or some combination of cost and market value, in 
        reviewing such transactions.'' (Emphasis added.)
    NAFC agrees with the Division in its recommendation. Regardless of 
what action Congress ultimately takes with respect to PUHCA, federal 
legislation is needed to address the consumer and competitive abuses 
now arising from situations where the public utility transfers assets 
and personal to unregulated, non-utility operations which seek to 
displace existing firms through cost shifting and cross-subsidization.
    Again, present PUHCA repeal legislation, such as S. 313, does not 
affirmatively prohibit cross-subsidization, and state regulation is 
inadequate to prevent siphoning of ratepayer dollars in a holding 
company structure.
    This is especially true with regard to situations where assets are 
transferred from the utility itself to an associate company engaged in 
unregulated, non-utility operations. Increasingly, as noted by the SEC 
report, utilities are resorting to this new means of conferring a 
competitive advantage upon their non-regulated subsidiary or affiliate 
which is not normally recognized by state regulators as falling under 
the traditional definition of cross-subsidization. This more modern 
subsidy is the transfer of tangible and intangible assets at very 
little or no cost to the non-utility subsidiary or associate company. 
Typically, this would be in the form of marketing data either in the 
aggregate or with reference to specific customer sites, or would 
concern the transfer of generating assets, or the laying of fiber optic 
cable. For example, 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 built 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 advent of fiber optic cable and advanced energy monitoring 
capability now make it possible for utilities to know in advance of 
even the customer when residential or commercial equipment may fail. 
Such information may be turned over to the utility's service affiliate 
without any opportunity for private sector competitors to service even 
existing accounts. It is no surprise that investor owned utilities have 
invested billions of dollars into telecommunications in order to 
capture this market.
    Once again, because of its nature as a utility, the local energy 
provider is in a position to acquire specific information regarding a 
customers energy usage. This can include more than just total or 
average consumption, but also the type of equipment being used, its 
load profile, the customers frequency and type of repairs, equipment 
age and model, customer credit and billing history. Such information is 
possessed by the utility by virtue of its monopoly status and can be 
easily transferred to its non-utility affiliate or subsidiary for use 
in providing a significant competitive advantage against private sector 
competitors which are unable to obtain such information no matter what 
the cost.
    Pending PUHCA repeal legislation, such as S. 313, does not require 
holding companies to provide competitors with comparable access to 
information obtained from monopoly affiliates.
    Another asset of substantial value which is conferred upon non-
regulated affiliates and subsidiaries is the ability to trade upon the 
utility's goodwill (name and logo). Having been conferred a monopoly 
franchise for decades during which their existing captive customer base 
became acquainted with a utility's name and trade marks, utilities now 
routinely provide their non-utility subsidiaries and affiliates with 
all the good will previously acquired. Although, the owners of the 
utility have a right to permit usage of their identifying marks to 
those they deem fit, they should not be permitted to do so without 
recovering the fair market value of such an asset since failure to do 
so represents a subsidy from the utility side of operations to the non-
utility side.
    While ratepayers may not be entitled to ownership rights in the 
asset, they have a beneficial interest in it and have certainly 
contributed to its value. Failure to compensate them not only unduly 
drives up rates by foregoing revenues which could otherwise accrue to 
the utility but also conveys a substantial unfair competitive advantage 
over private sector competitors.
    Unfortunately, pending legislation limits state commission review 
of the transfer of assets and fails to require fair compensation to 
ratepayers for the transfer of ratepayer financed assets.
    Access to Books and Records. 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 non-utility businesses. With increasing 
speed, utilities are expanding their acquisition of contracting firms 
in the HVAC/R, electrical, telecommunications, and security and alarm 
monitoring fields. The sheer number of non-utility business activities 
brings greater potential for improper allocation of centralized service 
company costs to the non-utility businesses (i.e., electric ratepayers 
subsidizing the non-utilities' 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 all companies in a holding company system that are relevant 
to costs incurred by an affiliated utility or to the transfer of 
assets, personnel, employees, or the sharing of facilities and 
employees between a utility and its affiliated or associate companies. 
This is equally true with respect to both registered and exempt holding 
company systems. If Congress modifies or repeals PUHCA, it should 
ensure that ratepayers are protected from affiliate abuse. In addition, 
NAFC recommends that states should also be given clear authority to 
review affiliate contracts--up-front--to assure that all 
anticompetitive issues are adequately addressed before they become a 
problem.
    Finally, NAFC believes that any effort to revise the Public Utility 
Holding Company Act should take place in the context of overall, 
comprehensive revision of those key statutes which form the basis of 
public utility law, including the federal Power Act, the Public Utility 
Regulatory Policies Act, and other relevant statutes.
                                 ______
                                 
 Prepared Statement of Plumbing-Heating-Cooling Contractors--National 
                              Association
    The Plumbing-Heating-Cooling Contractors--National Association 
would like to submit the following testimony to the Subcommittee on 
Finance and Hazardous Materials on the importance of the 1935 Public 
Utility Holding Company Act (PUHCA) in today's competitive energy 
market.
PHCC--National Association
    The Plumbing-Heating-Cooling Contractors--National Association, 
founded in 1883, is the oldest trade organization in the construction 
industry, and the largest in the plumbing-heating-cooling industry. The 
PHCC-National Association membership is composed of more than 5,000 
contracting firms nationwide, including both union and open shops, 
performing all types of work from residential and commercial to 
industrial and institutional. Whether serving as a subcontractor or a 
general contractor, PHCC-National Association members engage in 
maintenance, remodeling, service and repair, and new construction in 
the following fields: air-conditioning, backflow prevention, heating 
(warm air and hydronics), plumbing, process piping, refrigeration, fire 
sprinklers, sheet metal, and ventilation.
    The PHCC--National Association is a member of the National Alliance 
for Fair Competition (NAFC) and endorses NAFC's positions on PUCHA 
repeal and on comprehensive electric utility restructuring.
    The PHCC--National Association is also a member of the Consumers 
for Fair Competition (CFC) and endorses its policies on PUHCA repeal 
and on the mitigation of market power in a deregulated energy market.
Introduction: PUHCA is Still Relevant Today
    Some have argued that PUHCA is an impediment to electric 
competition. Others have argued that PUHCA helps competition by 
preventing electric monopolies from competing unfairly. Both are right.
    PUHCA is simultaneously an impediment to and a protector of free 
and open competition. While PUHCA's regulatory structure may restrict 
utility holding companies from competing as much as they wish, at the 
same time it ensures that what competition does occur is open and fair. 
As Congress considers PUHCA repeal, and electric restructuring in 
general, the trick will be to remove the barriers restricting 
competition without removing those barriers that prevent unfair 
competition and prohibit anti-competitive practices.
    The PHCC--National Association believes the market power provisions 
of PUHCA are still necessary today in order to ensure truly fair and 
open competition occurs. PUHCA should only be repealed if it is done in 
the context of comprehensive utility restructuring, and if such 
comprehensive legislation contains adequate safeguards against market 
power abuses.
    While current proposals to repeal PUHCA retain important 
bookkeeping and financial reporting requirements, these proposals fail 
to retain the current cost allocation rules that govern affiliate 
transactions. Current proposals also fail to require the same level of 
operational separation that exists today, which prevents a utility from 
inappropriately supporting its unregulated affiliates with ratepayer 
assets.
    The primary reason for establishing PUHCA in the first place was to 
prevent utilities from using assets gained from the ratebase to support 
the utility holding company's competitive affiliates. Utility holding 
companies had been abusing the market power derived from their captive 
customers (rate-payers) to support a range of subsidiary companies that 
used this market power to gain an unfair and anti-competitive edge over 
their competitors. Such actions harmed both ratepayers, because their 
energy rates were unnecessarily increased, and competitors, because 
they were competing against a company supplied with the limitless 
assets of a monopoly. PUHCA reined in the monopolies and established 
the financial and operational separation necessary to ensure that 
unregulated utility holding company affiliates operated in the same 
manner as every other business in America--without the benefit of a 
captive ratebase to finance its operations.
    As utilities and their affiliate companies begin to compete in 
different economic sectors and at an ever-increasing rate, the original 
justification for PUHCA's market power provisions become more evident. 
In many instances, the first competitive affiliates a utility 
establishes operate in the energy services market.
Utilities Compete Against Small Businesses in the Energy Market
    Small businesses, especially contracting firms, are not just 
consumers of electricity. They are also competitors in the energy 
market. Professional contracting firms have been the traditional source 
for providing, installing, servicing and maintaining energy efficient 
products and services. A dynamic, deregulated energy market will bring 
even more business opportunities in energy efficiency and load 
management for small businesses.
    Congress must keep in mind when considering electric utility 
restructuring that utilities and their affiliates will not just be 
competing against other utilities. They will also be competing against 
family-owned small businesses found in every community. There is 
nothing wrong with competition, so long as the utilities do not compete 
unfairly by using their rate-base to support their private-market 
ventures.
    Every day, PHCC members face a wide rage of competitors, from other 
professional contractors, fly-by-night repairmen, national service 
centers like Sears and Home Depot, and affiliated subsidiaries of 
utilities. PHCC members are not opposed to competition and do not seek 
to limit the number of competitors in their field though any means of 
legislation or regulation.
    PHCC members are, however, fiercely opposed to utilities' unfair 
and anti-competitive behavior. Increasingly, over the past decade, 
contractors have seen unfair competition from utilities and their 
affiliated service companies.
Description of Unfair Utility Competition
    Unfair utility competition occurs when a utility uses the unique 
advantages of its situation as a government-sanctioned monopoly to 
support the competitive business operations of its subsidiaries. This 
is often referred to as cross-subsidization, because the regulated 
rate-base is subsidizing the unregulated affiliates. PHCC members have 
been subjected to unfair utility competition since the 1960's. But with 
deregulation of the natural gas industry in 1992, and the current 
momentum of electricity deregulation at the state level, instances of 
unfair and anti-competitive behavior are increasing to dangerous 
levels.
    Cross-subsidization comes in many forms and sizes. It is not just 
the transferring of money from the parent utility to the affiliated 
subsidiary. Any service, product, tool, or even goodwill that is passed 
to the affiliate without compensating the ratepayers with the fair 
market value of that product or service is unfair and anti-competitive. 
Any time a utility refers a consumer to its affiliate, or denies or 
delays utility service to a competitor of its affiliate, is an instance 
of unfair utility competition.
    Some examples of cross-subsidization that create unfair competitive 
advantages are:

 Equipment Transfer: A utility transfers equipment that has 
        been paid for through the utility rate-base (i.e., the electric 
        bill) to the affiliated service company. Such equipment could 
        be service vans or computers.
 Customer Data: The utility provides, at little or no cost, 
        utility-developed ratepayer profiles for the affiliated service 
        company's marketing efforts. These ratepayer profiles become 
        sales leads for the affiliate.
 Personnel Transfer: The affiliated service company uses the 
        utility's personnel for service calls. The service company then 
        has a workforce whose salary, health care, employment taxes, 
        and retirement plans are paid for by the ratepayers.
 Customer Steering: The utility steers consumers--through toll-
        free customer service lines, a website, direct marketing in 
        bill-stuffers and via other means of advertising--to the 
        utility's affiliate and recommends the affiliate's products and 
        services.
 Overhead Transfer: The utility pays for the affiliate's 
        overhead, such as providing accounting and legal services, 
        purchasing office supplies, or providing free office space in 
        the utility's buildings.
 Joint Marketing: The utility allows only the affiliate to add 
        bill stuffers advertising the subsidiary's services in the 
        utility's monthly rate-bills, for free.
 Name Recognition: The affiliated service company uses 
        utility's name and logo. Consumers tend to go with what they 
        know, and most everyone knows who their utility is. Consumers 
        may then incorrectly assume that the affiliate's quality 
        control and financial stability are also regulated and approved 
        by the state public service commission.
    One must ask: How much would a family-owned construction company 
have to pay for these services, products, and benefits? Did the utility 
affiliate pay the fair market value? Were the ratepayers compensated 
for the use of these assets and benefits they paid for through their 
bills, or have their rates been lowered by that amount?
How PUHCA Prevents Unfair Competition and Cross-subsidization
    PUHCA contains three provisions that combine to prevent utility 
holding companies from using ratepayer assets to compete unfairly:

 Financial Bookkeeping and Reporting: Registered utility 
        holding companies must file detailed financial reports for the 
        utility and its affiliates, which are then made public.
 Operational Separation: The subsidiary companies must be both 
        financially and physically separate from the parent utility. 
        The affiliated subsidiary may not use the same equipment, 
        personnel, office space, vehicles, etc.
 Affiliate Cost Allocation Rules: Strict guidelines govern the 
        transfer of assets between the regulated utility and its 
        affiliates to ensure no unnecessary costs are passed to the 
        ratepayers.
    Current proposals to overhaul or repeal PUHCA only carry over the 
financial bookkeeping and reporting requirements. These proposals do 
not replace the other two provisions and leave a gaping hole in the 
fair competition coverage.
    Separation between a utility and an affiliate is not 
``protectionist.'' Separation is a statement that tells an affiliated 
company that it must operate in the same manner as every other business 
in America: it must build its own name, develop its own customers, hire 
its own employees, and fund its operations independently. The general 
public did not finance the creation of any contractor or small 
business. Why should the general public, through their monthly utility 
bill, finance a utility's for-profit affiliates?
    While strict financial bookkeeping and reporting is important to 
prevent unfair competition, it is not enough. With just the reporting 
requirements, we are left to simply witness the crime without the 
ability to prevent it or punish it. If Congress expects a truly open 
and fair competitive energy market to develop, it cannot repeal or 
reform PUHCA without replacing all three fair competition requirements: 
proper affiliate transaction cost allocation, operational separation 
between affiliates and the utility, and strict financial bookkeeping 
and reporting.
    The PHCC--National Association urges Congress to include NAFC's 
fair competition language in any electric utility restructuring 
legislation. This legislative language is included in Appendix A.
    The fact that Congress used provisions similar to PUHCA's in the 
1996 Telecommunications Deregulation Act is a testament to the need for 
strong market power provisions in today's competitive markets. Congress 
should not set a lower standard of fair competition in the energy 
market than it did in the telecommunications market.
States Cannot Do It Alone
    Repealing PUHCA and expecting state utility commissions to have the 
ability and authority to police a multi-state utility holding company 
is counter intuitive. The entire reason why Congress created PUHCA in 
the first place was because the state utility commissions did not have 
the ability and authority to stop multi-state utility holding companies 
from competing unfairly.
    States, either through legislation or through their public service 
commissions, cannot promote and police fair competition by themselves. 
Their jurisdiction is limited to ensuring fair competition for those 
utilities that solely compete in their own state. State public service 
commissions need federal guidance to help deal with situations where 
the competing utility crosses state boundaries. This is often the case 
with those utility holding companies PUHCA applies to.
    Repealing or reforming PUHCA in the context of comprehensive 
restructuring will prevent utility holding companies from gaining an 
unfair competitive advantage by competing across state lines.
Conclusion
    The PHCC--National Association believes that in America everyone 
should be allowed to compete, no matter who they are. However, no one 
should be allowed to cheat and no one should be forced to compete 
against a monopoly. Utility holding companies should not be allowed to 
use any advantage they may have (or had) from being a government-
sanctioned monopoly to compete unfair against another company.
    PUHCA should only be repealed or reformed in the context of 
comprehensive restructuring and only if sufficient safeguards are in 
place to prevent utility holding companies from cross-subsidizing. Any 
legislation repealing or reforming PUHCA must require operational 
separation between the utility and its affiliates; provide a clear 
grant of authority to both the states and FERC for the prohibition of 
anti-competitive actions; permit access to any and all books and 
records, wherever located, when necessary for investigation; prohibit 
the cross-subsidization of non-regulated businesses by regulated 
utilities; restrict self-dealing and discrimination between utilities 
and their affiliates; and prevent the transfer of a utility's non-
tangible assets to its affiliate (i.e. customer profiles and corporate 
name, and logo).
                               Appendix A
    Proposed Fair Competition Language for Stand Alone PUHCA Repeal
  participation by public utilities in providing certain non-utility 
                               services.
    (a) In General
    (1) Notwithstanding any law to the contrary, any public utility 
company, subsidiary company, affiliate, or associate company of a 
publicutility company, may engage in, directly or indirectly, any 
activity whatsoever, wherever located, necessary or appropriate to the 
provision of non-utility services as described herein, subject to the 
provisions of this Act and the jurisdiction of the State Commission and 
the Federal Energy Regulatory Commission.
    (2) Non-Utility Services--No public utility company shall engage in 
the design, sale, distribution, lease, rental, installation, 
construction, modernization, retrofit, maintenance or repair of 
systems, products or equipment, including household appliances, except 
as permitted under this section.
        (A) Exceptions. The provisions of this section shall not be 
        applicable in instances of emergency or to protect the life, 
        health, or safety of any customer or property; or where the 
        utility is the sole source of such systems, products, equipment 
        or services.
    (b) Prohibition of Cross-Subsidization.--
    The state commissions shall exercise their jurisdiction pursuant to 
this Act and to the extent otherwise authorized under applicable law 
with respect to prohibiting the cross subsidization of the activities 
described in subsection (a) by a publicutility company in its rates for 
electric or gas services, and (2) to make appropriate rate adjustments, 
disallow any cost recovery, or make any determination regarding the 
allocation of charges, to eliminate the effects of any cross-
subsidization or to prohibit any unjust, unreasonable, preferential or 
discriminatory rate.
    (c) Structural and Transactional Requirements.--
    Any activity authorized under subsection (a) shall only be 
conducted under a subsidiary company, affiliate, or associate company 
which is separate from any public utility company engaged in the 
generation, transmission, or distribution of electric power or gas.
    (A) Such separate company, affiliate, or associate company--
      (1) shall maintain books, records, and accounts in the manner 
            prescribed by the state public utility commission which 
            shall be separate from the books, records, and accounts 
            maintained by the public utility company of which it is an 
            associate company and any other subsidiary or affiliate of 
            such public utility company, shall maintain proper internal 
            cost-allocation procedures as prescribed by the state 
            commission;
      (2) shall have separate officers, directors, and employees from 
            the public utility company;
      (3) may not obtain credit under any arrangement that would permit 
            a creditor, upon default, to have recourse to the assets of 
            a public utility company; and
      (4) shall conduct all transactions with the public utility 
            company of which it is an associate on an arm's length 
            basis with any such transactions reduced to writing and 
            available for public inspection.
    (d) Independent Audit Authority for State Commissions.--
    Any state commission with jurisdiction over a publicutility company 
that is an associate company of a registered holding company and which 
company transacts business with a subsidiary company, affiliate, or 
associate company of such holding company engaging in any activities 
described in subsection (a) may request that the company engaging in 
such activities have performed, no more frequently than on an annual 
basis, an independent audit of transactions between such jurisdictional 
publicutility company, its affiliates, subsidiaries, or associates 
companies and such company engaging in such activities. If such an 
audit is ordered, the State Commission shall select and supervise an 
independent management or other accounting firm to perform the audit. 
The company shall bear the costs of performing such an audit. The audit 
report shall be provided to the State commission within 6 months of the 
audit request.
    (e) Fair Competition.--
    In its dealings with its subsidiary or affiliate as described in 
subsection (a) a public utility company
    (1) may not unfairly discriminate in favor of its subsidiaries or 
affiliates, and any other entity in the provision or procurement of, or 
access to, goods, services, facilities, and information, or in the 
establishment of standards or referral of customers;
    (2) may not provide information, including marketing leads, to such 
company, its subsidiaries or affiliates, unless such information is 
made available to other persons on reasonable and non-discriminatory 
terms and conditions; nor shall any utility provide, transfer, or 
permit the use of, or access to, tangible or intangible assets of the 
utility which were acquired with ratepayer funds unless such transfer, 
provision, or other use of such assets is fully compensated by the 
subsidiary, associate, or affiliated company;
    (3) shall account for all transactions with a subsidiary described 
in subsection (a) in accordance with generally accepted accounting 
principles and shall value any assets that are transferred directly or 
indirectly from the public utility company to its affiliates, 
subsidiaries or associate companies, and shall record such 
transactions, in accordance with such regulations as may be prescribed 
by the State commission to prevent improper cross subsidies.
    (4) the name, logo, service mark, trademark, or trade name of the 
separate subsidiary or affiliate of a public utility company shall not 
resemble the name, logo, service mark, trademark or trade name of the 
public utility company and neither the public utility company nor the 
separate subsidiary or affiliate may trade upon, promote, or advertise 
their affiliate or related status.
    (f) Proprietary Information.--
    (1) In complying with the requirements of this section, each public 
utility company and any subsidiary, affiliate, or associate company of 
such public utility company shall have a duty to protect the 
confidentiality of propriety information of competitors and customers. 
A public utility may not share customer proprietary information in 
aggregate form with its subsidiaries, affiliates or associate companies 
unless such aggregate information is available to other competitors or 
persons under the same terms and conditions. Individually identifiable 
customer proprietary information and other proprietary information may 
be
    (A) shared only with the written consent of the person to which 
        such information relates or from which it was obtained; or
    (B) disclosed to appropriate authorities pursuant to court order.
    (2) Exceptions.--Paragraph (1) does not limit the disclosure of 
individually identifiable customer proprietary information by each 
public utility as necessary
    (A) to initiate, render, bill, and collect for the service or 
        products requested by a customer; or
    (B) to protect the rights or property of the public utility, or to 
        protect users of any of those services from fraudulent, 
        abusive, or unlawful use of any such service.
    (h) Implementation--
    Each State commission, for each public utility company under its 
jurisdiction which is not a registered holding company, shall:
    (A) Hold a hearing and make a determination based on evidence 
        presented in the record as to what rules, procedures, or other 
        actions are necessary to implement the safeguards set forth in 
        subsections (a)-(f) of this Section; and
    (B) promulgate any regulations necessary to implement those 
        sections within one year from the date of enactment of this 
        Act.


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