[Senate Report 105-41]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 104
105th Congress                                                   Report
                                 SENATE

 1st Session                                                     105-41
_______________________________________________________________________


 
             THE PUBLIC UTILITIES HOLDING COMPANY ACT OF 1997

                               __________

                              R E P O R T

                                 of the

                     COMMITTEE ON BANKING, HOUSING,

                           AND URBAN AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                 S. 621




                 June 27, 1997.--Ordered to be printed


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                 ALFONSE M. D'AMATO, New York, Chairman
PHIL GRAMM, Texas                    PAUL S. SARBANES, Maryland
RICHARD C. SHELBY, Alabama           CHRISTOPHER J. DODD, Connecticut
CONNIE MACK, Florida                 JOHN F. KERRY, Massachusetts
LAUCH FAIRCLOTH, North Carolina      RICHARD H. BRYAN, Nevada
ROBERT F. BENNETT, Utah              BARBARA BOXER, California
ROD GRAMS, Minnesota                 CAROL MOSELEY-BRAUN, Illinois
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska

                    Howard A. Menell, Staff Director
                Philip E. Bechtel, Deputy Staff Director
     Steven B. Harris, Democratic Staff Director and Chief Counsel
                        Laura S. Unger, Counsel
                   Helena Grannis, Professional Staff
                   Mitchell Feuer, Democratic Counsel
         Andrew Lowenthal, Democratic Professional Staff Member
                       George E. Whittle, Editor



                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1
History of the Legislation.......................................     1
Purpose and Summary..............................................     2
Purpose and Scope................................................     3
    Background...................................................     3
        The ``unregulated'' energy industry......................     3
        The new regulatory regime--The Public Utility Holding 
          Company Act of 1935....................................     4
        The studies begin a twenty year debate on PUHCA..........     5
        Recent SEC study triggers Committee action...............     6
    The Legislation Reforming PUHCA..............................     7
        The 1935 Act has become ineffective and burdensome.......     7
        Protecting consumers from paying unfair rates............     9
        Closing the Ohio Power gap...............................    11
        Expanding the regulators' access to company books and 
          records................................................    12
        A level playing field for all............................    13
Section-by-Section Analysis of S. 621: ``The Public Utility 
  Company Act of 1997''..........................................    15
    Section 1. Short title.......................................    15
    Section 2. Findings and purposes.............................    15
    Section 3. Definitions.......................................    15
    Section 4. Repeal of the Public Utility Holding Company Act 
      of 1935....................................................    16
    Section 5. Federal access to books and records...............    16
    Section 6. State access to books and records.................    16
    Section 7. Exemption authority...............................    17
    Section 8. Affiliate transactions............................    17
    Section 9. Applicability.....................................    17
    Section 10. Effect on other regulations......................    17
    Section 11. Enforcement......................................    17
    Section 12. Savings provisions...............................    18
    Section 13. Implementation...................................    18
    Section 14. Transfer of resources............................    18
    Section 15. Effective date...................................    18
    Section 16. Authorization of appropriations..................    18
    Section 17. Conforming amendment to the Federal Power Act....    18



                                                       Calendar No. 104
105th Congress                                                   Report
                                 SENATE

 1st Session                                                     105-41
_______________________________________________________________________


            THE PUBLIC UTILITIES HOLDING COMPANY ACT OF 1997

                                _______
                                

                  June 27, 1997.--Ordered to be printed

_______________________________________________________________________


Mr. D'Amato, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 621]

    The Committee on Banking, Housing, and Urban Affairs to 
which was referred the bill (S.621) to repeal the Public 
Utility Holding Company Act of 1935, to enact the Public 
Utility Holding Company Act of 1997, and for other purposes, 
having considered the same, reports favorably thereon with an 
amendment(s) and recommends that the bill (as amended) do pass.

                              introduction

    On June 5, 1997, the Senate Committee on Banking, Housing, 
and Urban Affairs met in legislative session and marked up and 
ordered to be reported S. 621, a bill to repeal the Public 
Utility Holding Company Act of 1935 (``PUHCA'') and to enact 
the Public Utility Holding Company Act of 1997, and for other 
purposes, with a recommendation that the bill do pass, with an 
amendment. The Committee adopted a Managers' Amendment, offered 
by Senators D'Amato and Sarbanes, making certain technical 
amendments. The Committee's action was taken by a voice vote. 
Senators Kerry, Bryan and Johnson asked to be recorded as 
voting in the negative.

                       history of the legislation

    The Public Utility Holding Company Act of 1997, S. 621, was 
introduced on April 22, 1997 by Senators D'Amato, Murkowski, 
Dodd, Sarbanes, Gramm, Shelby, Mack, Faircloth, Allard, Lott, 
Domenici, Akaka, Inouye, Coats, Cochran, Roberts, Brownback, 
Coverdell, Specter, and Nickles. Senators Enzi and Bennett were 
added as additional cosponsors. The legislation introduced was 
identical to S. 1317, the ``Public Utility Holding Company Act 
of 1996,'' which was reported by the Banking Committee on 
September 10, 1996. S. 621 has two purposes: first, to repeal 
the Public Utility Holding Company Act of 1935; and second, to 
put in place a new regulatory structure that allows for greater 
geographic and business diversification in the utility industry 
while ensuring that utility customers do not pay for this 
diversification through increased energy rates.
    The full Committee conducted a legislative hearing to 
consider S. 621 on April 29, 1997. The Committee received 
testimony from: Senator Frank H. Murkowski, Chairman of the 
Senate Committee on Energy and Natural Resources (the ``Energy 
Committee'); the Honorable Isaac Hunt, Commissioner, Securities 
and Exchange Commission (``SEC'); Susan Tomasky, General 
Counsel, Federal Energy Regulatory Commission (``FERC'); Robert 
W. Gee, Chairman, Electricity Committee, National Association 
of Regulatory Utility Commissioners (``NARUC'); Ronald J. 
Tanski, Controller, National Fuel Gas Company; Fred C. Meyer, 
Jr., Senior Vice President & General Counsel, Central & South 
West Corporation; Leslie E. LoBaugh, Vice President & General 
Counsel, Pacific Enterprises; Mark Cooper, Director of 
Research, Consumer Federation of America; Larry Frimerman, 
Federal Liaison, Ohio Consumers' Counsel, testifying on behalf 
of National Association of State Utility Consumer Advocates 
(``NASUCA''). Consumers for Fair Competition and the 
Electricity Consumers Resource Council (``ELCON'') also 
submitted testimony.
    Additional comments, suggestions, and assistance in 
considering and evaluating the legislation was received from 
the state regulators, the staff of the Energy Committee, the 
SEC, the FERC, and others.

                          PURPOSE AND SUMMARY

    The bill reported by the Committee would repeal PUHCA. 
Repealing PUHCA would streamline regulation and eliminate 
unnecessary duplication, thus facilitating competition in the 
energy industry. PUHCA no longer serves its original purpose of 
restructuring the energy industry and protecting investors and 
consumers from holding company abuses. The nature of the 
utility industry has changed, the state and federal governments 
have implemented regulatory controls, and Congress has enacted 
federal energy laws and federal securities laws--all of which 
more than adequately protect consumers and utility rate payers. 
In light of these developments, PUHCA has become obsolete. As 
the SEC--the federal agency that enforces PUHCA--has testified, 
PUHCA ``has become redundant in many respects, as a result of 
prudent administration of the statute and the development and 
evolution of other state and federal regulation.'' 1
---------------------------------------------------------------------------
    \1\ Statement of Isaac C. Hunt, Commissioner, Securities and 
Exchange Commission, Hearing on the Public Utility Holding Company Act 
of 1997, Senate Committee on Banking, Housing and Urban Affairs, April 
29, 1997.
---------------------------------------------------------------------------
    The Committee recognizes that repealing PUHCA not only 
streamlines regulation, but also takes a necessary step in 
creating competition in the electricity industry. As Senator 
Johnston testified at the Committee's 1996 hearing on S. 1317: 
``the transition to competitive retail markets will be hindered 
and more costly unless PUHCA is repealed as a first step down 
the restructuring road * * * true and fair retail completion 
will be thwarted without PUHCA repeal.'' 2 The 
Committee believes that the debate on comprehensive energy 
reform should be reserved for the Energy Committee, the FERC, 
and the States.
---------------------------------------------------------------------------
    \2\ Testimony of Senator J. Bennett Johnston, ``Hearing on the 
Public Utility Holding Company Act of 1995,'' Senate Committee on 
Banking, Housing and Urban Affairs, June 6, 1996 at 2.
---------------------------------------------------------------------------
    Perhaps most importantly, S. 621 would provide for 
additional consumer protections by enhancing regulatory 
oversight of the ratemaking process. The Committee believes 
that the regulators must be able to ensure that consumers pay 
only for costs associated with utility services. S. 621 would 
expand the existing ratemaking authority of federal and state 
energy regulators by allowing them to review the records of 
utility transactions in order to protect ratepayers from unfair 
rate increases and any abusive practices.
    The bill would also allow the FERC and the States to 
protect ratepayers more effectively by addressing a problem 
created by the decision of the Court of Appeals for the 
District of Columbia Circuit in Ohio Power Company v. FERC 
3 (``Ohio Power''). The court in Ohio Power held 
that the FERC did not have authority to regulate certain costs 
in setting utility rates when those costs had previously been 
approved by the SEC. The Ohio Power decision also put into 
question the States' authority in this area. S. 621 would 
remove the SEC from the ratemaking process and it would restore 
the FERC's (and implicitly the States') full ratemaking 
authority.
---------------------------------------------------------------------------
    \3\ Ohio Power Company v. FERC, 954 F.2d 779 (D.C. Cir. 1992).
---------------------------------------------------------------------------
    Finally, S. 621 would ensure that regulators have the 
necessary authority to protect consumer rates by granting the 
FERC and the state public service commissions the authority to 
review a holding company's books and records to the extent 
necessary to review rates. The legislation would give the FERC 
and state public service commissions access to books and 
records of all utility holding companies, and their associates, 
affiliates, and subsidiaries that are relevant to the 
determination of rates. 4 The bill also contains an 
enforcement mechanism to ensure that the state commissions will 
be able to implement this newly expanded books and records 
review authority.
---------------------------------------------------------------------------
    \4\ These provisions augment the existing books and records 
authority of both the FERC (as contained in the Federal Power Act, 16 
U.S.C. 825) and the state commissions.
---------------------------------------------------------------------------

                           PURPOSE AND SCOPE

Background

            The ``unregulated'' energy industry
    In the early 1900's utility holding companies expanded 
rapidly--``fueled'' by growth in the electric and gas 
industries and financing from Wall Street.5 As a 
result of this rapidgrowth, the power industry was concentrated 
among a handful of large interstate holding company 
systems.6 In the late 1920's, at Congress's request, 
the Federal Trade Commission (``FTC'') undertook an extensive 
study of the public utility industry. At the conclusion of this 
seven year study, the FTC published a 107 volume report. The 
FTC report was followed by a second, two-year Congressional 
study. Both studies uncovered a myriad of utility industry 
abuses facilitated by the holding company structure. These 
included the issuance of securities based on unsound assets, 
mismanagement and exploitation of subsidiaries, interaffiliate 
dealing, and the use of the holding company structure to evade 
effective regulation.7
---------------------------------------------------------------------------
    \5\ SEC Study, ``Regulation of Public Utility Holding Companies, 
Division of Investment Management,'' June 1995 (``SEC Study'') at 1.
    \6\ Id. at 3.
    \7\ Id. at 3.
---------------------------------------------------------------------------
    The studies found that the utility holding companies'' 
pyramidal corporate structure facilitated most of the industry 
abuses. Holding companies bought other holding companies--
creating up to 10 layers of ownership between the utility 
subsidiary and its holding company. Since it was difficult to 
determine the true assets and liabilities of the company, this 
structure greatly increased the speculative nature of the 
holding company's securities. The holding companies manipulated 
market rates for their securities and inflated their capital 
structure by forcing subsidiaries to buy supplies from 
affiliates at exorbitant above-market prices. The holding 
company structure made it virtually impossible to trace these 
abusive interaffiliate transactions. As a result of the abuses, 
investors were defrauded, subsidiary companies were forced to 
pay excessive prices for services, and in the end, energy 
prices were grossly inflated.
    States were unable and ill-equipped to regulate these 
multistate holding companies effectively. At that time, many 
states did not have a utility-related regulatory structure in 
place and the Supreme Court considered state regulation of 
multistate holding companies a violation of the Commerce Clause 
of the Constitution.8
---------------------------------------------------------------------------
    \8\ Id. at 2.
---------------------------------------------------------------------------
            The new regulatory regime--The Public Utility Holding 
                    Company Act of 1935
    Congress enacted the Public Utility Holding Company Act 
(``PUHCA'') in 1935 to remedy these holding company abuses. 
First, PUHCA mandated the simplification of the utility holding 
company structure. The break-up of mammoth holding company 
systems was achieved by imposing an ``integration 
requirement,'' which limited holding companies to owning only 
energy and energy-related companies in discrete geographic 
areas.
    Second, PUHCA gave the SEC authority to oversee these 
companies.9 Under this regulation, holding companies 
with multistate utility operations were required to register 
with the SEC and thus become subject to the full panoply of 
regulation imposed by PUHCA.10 Prior SEC approval 
was required for certain corporate transactions engaged in by 
registered holding companies such as: issuance of securities, 
acquisition of utility assets, and some merger activities. 
Restrictions against interaffiliate loans and diversification 
into non-utility businesses were imposed. PUHCA also subjected 
registered holding companies to extensive reporting and 
accounting requirements.
---------------------------------------------------------------------------
    \9\ Id. at 7. The Congress determined that the SEC should oversee 
holding companies and PUHCA since the agency had ``expertise in 
financial transactions and corporate finance.'' Id.
    \10\ Id. The companies are referred to as ``registered utility 
holding companies'' since they are registered with the SEC under PUHCA. 
Currently there are 15 such registered utility companies. There are 
twelve registered electric holding companies: Allegheny Power System, 
American Electric Power Company, Central and South West Corporation, 
CINergy, Eastern Utilities Associates, Entergy Corporation, GPU 
Corporation, New England Electric System, Northeast Utilities, PECO 
Energy Power Company, The Southern Company, and Unitil Corporation. 
Also, there are three registered gas companies: Consolidated Natural 
Gas Company, National Fuel Gas Company, and Columbia Gas System.
    PUHCA allowed the SEC to exempt conditionally from all provisions 
of the Act, execpt those governing utility acquisitions, certain 
holding companies which are ``predominately intrastate in character and 
carry on their business substantially in a single state.'' 15 U.S.C. 
79c(a)(1). These companies are referred to as ``exempt utility holding 
companies.'' There are currently approximately 165 exempt utility 
holding companies.
---------------------------------------------------------------------------
            The studies begin a twenty year debate on PUHCA
    Congress has debated the issue of PUHCA reform for nearly 
twenty years. The industry, the regulators, the Congress, and 
consumer and environmental protection groups agree that the SEC 
has completed its task--assigned over sixty years ago-- of 
simplifying the utility holding company structure and that many 
of the remaining PUHCA provisions duplicate other federal or 
state laws or are unduly burdensome.
    In 1932--three years before PUHCA became law-- thirteen 
large holding companies controlled 75% of the electric 
utilities while eleven companies held over 80% of the gas 
pipelines.11 Currently there are only 12 registered 
electric utility holding companies and 3 registered gas utility 
holding companies which together, at the end of 1993, owned 
only 19% of all investor-owned utility assets.12 The 
remaining 165 exempt gas and electric utility holding companies 
own over half of all such utility assets.
---------------------------------------------------------------------------
    \11\ CRS Report, ``The Public Utility Holding Act of 1935: 
Legislative History, Background and Recent Amendments,'' 93-266 A. at 
2.
    \12\ SEC Study, supra note 5, at vii; see also, note 10, supra.
---------------------------------------------------------------------------
    In 1977, the General Accounting Office (``GAO'') issued a 
report on the SEC's enforcement of PUHCA.13 The GAO 
initiated the report in response to an inquiry from Congressman 
John Dingell, then Chairman of the Subcommittee on Energy and 
Power of the House Committee on Interstate and Foreign 
Commerce. The GAO reported that many of PUHCA's objectives had 
been met by the SEC's actions to reorganize and simplify the 
pyramidal corporate structures and that, as a result, financial 
conditions in the gas and electric utility industries had 
become more stable. Recognizing that Congress might need to 
reform PUHCA, the GAO included in its recommendations that the 
SEC undertake a complete study on PUHCA.14
---------------------------------------------------------------------------
    \13\ ``The Force of The Public Utility Holding Company Act has Been 
Greatly Reduced by Changes in the Securities and Exchange Commission's 
Enforcement Policies.'' GAO Report to the Congress FGMSD-77-35, June 
20, 1997.
    \14\ Id. at 16-17.
---------------------------------------------------------------------------
    The SEC recommended to Congress in 1981 that Congress 
repeal PUHCA: ``on the basis that the reorganization of holding 
companies contemplated under [PUHCA] had been completed and 
that the remaining provisions were either duplicative of other 
regulatory schemes or no longer necessary to prevent the abuses 
that led to enactment of [PUHCA].'' \15\ Senator D'Amato, then 
Chairman of the Securities Subcommittee of the Banking 
Committee, and Senator Johnston, then Ranking Member of the 
Energy Regulation Subcommittee of the Energy Committee, acted 
on the SEC's recommendation by introducing three separate bills 
to reform PUHCA. These measures sparked Congressional debate on 
PUHCA reform.16 Senator D'Amato set the tenor of the 
debate in his statement introducing the legislation on the 
Senate floor. He said that PUHCA reform was necessary because: 
``the Public Utility Holding Company Act is a major impediment 
to meaningful attempts to improve the economic well-being of 
the utility industry.'' 17
---------------------------------------------------------------------------
    \15\ CRS Report, supra note 11, at 15.
    \16\ In 1981, three measures were introduced by Senators D'Amato 
and Johnston regarding PUHCA: S. 1869, a bill to amend the Public 
Utility Holding Company Act of 1935 to simplify its administration and 
to remove restrictions no longer necessary to the protection of 
investors and consumers; S. 1870, a bill to amend the Public Utility 
Holding Company Act of 1935 to improve financial performance in the 
electric and gas utility industries by removing impediments to the 
exercise of sound and prudent business judgement by utility executives; 
and S. 1871, a bill to amend section 2 of the Public Utility Holding 
Company Act of 1935. (November 19, 1981, Congressional Record, 28357)
    \17\ Statement of Senator Alfonse M. D'Amato, dated November 19, 
1981, Congressional Record, 28357.
---------------------------------------------------------------------------
    In 1983, the GAO responded to the SEC's recommendations and 
to Senator D'Amato and Johnston's legislation by issuing 
another report on PUHCA. In this report, the GAO agreed that a 
number of PUHCA's provisions duplicated other laws. The GAO 
also identified regulatory gaps that would occur if PUHCA were 
repealed. For example, the report cited ``approvals of 
acquisitions and financing of holding companies and the review 
of cost allocations between holding companies and their service 
companies and utility subsidiaries'' as areas in which PUHCA 
provided the only authority for regulation. The GAO also cited 
the concerns of state regulators regarding their ability to 
regulate utility holding companies.18 The Committee 
convened a hearing regarding PUHCA reform on June 14 and 15, 
1983, but took no further action during that legislative 
session.
---------------------------------------------------------------------------
    \18\ GAO Report, ``Analysis of SEC's Recommendation to Repeal the 
Public Utility Holding Company Act,'' GAO/RCED-83-118, August 30, 1983, 
I-v.
---------------------------------------------------------------------------
    During the 20 year debate on PUHCA reform, Congress 
successfully enacted some amendments to the Act to respond to 
the changing dynamics of the energy industry. For example, in 
1978, Congress adopted the ``Public Utility Regulatory Policies 
Act'' to exempt certain new energy generation facilities from 
PUHCA regulation. In 1992, Congress enacted the ``Energy Policy 
Act'' to amend PUHCA and encourage competition in the wholesale 
energy market. In 1995, Congress enacted the 
``Telecommunications Act,'' which included a provision to 
encourage competition in the new telecommunications industry by 
allowing registered holding companies to establish exempt 
telecommunications subsidiaries. While Congress created limited 
opportunities for utility holding company diversification with 
these amendments to PUHCA, it has not yet accomplished 
comprehensive reform of the Act itself.
            Recent SEC study triggers committee action
    In 1994, the SEC began a comprehensive study of PUHCA. The 
study considered the effectiveness of the SEC's administration 
of PUHCA and examined initiatives for modernizing PUHCA in 
light of changes in the energy industry. In June 1995, the 
SEC's Division of Investment Management published a 
comprehensive report on the findings of the study, including 
the history of PUHCA, subsequent administrative and legislative 
changes to PUHCA, and the energy industry in general.
    The SEC report concluded that PUHCA has accomplished its 
basic purpose of protecting investors, simplifying the utility 
industry and preventing industry abuses. The report further 
concluded that PUHCA in many respects either duplicated other 
state or federal regulation or was no longer necessary to 
prevent the recurrence of the abuses that led to the statute's 
enactment.19 Although the SEC had first made this 
same finding in 1981, in the 1995 report the SEC examined more 
closely the effect of PUHCA repeal on the FERC and States' 
ability to continue to protect consumers.
---------------------------------------------------------------------------
    \19\ SEC Study, supra note 5, at 128-133.
---------------------------------------------------------------------------
    The SEC report recommended that Congress repeal PUHCA 
(subject to certain conditions) since ``the current regulatory 
system imposes significant costs, in direct administrative 
charges and foregone economies of scale and scope, that often 
cannot be justified in terms of benefits to utility 
investors.'' 20 The SEC recommended that Congress 
retain certain PUHCA provisions, noting that otherwise 
consumers could be exposed to some of the same abuses that 
PUHCA was enacted to prevent. As SEC Commissioner Isaac Hunt 
cautioned:
---------------------------------------------------------------------------
    \20\ SEC Study, supra note 5, at x.

        so long as electric and gas utilities continue to 
        function as monopolies, the need to protect against the 
        cross-subsidization of non-utility operations will 
        remain. The best means of guarding against cross-
        subsidization is likely to be thorough audits of books 
        and records and federal oversight of affiliate 
        transactions.21
---------------------------------------------------------------------------
    \21\ Statement of Isaac C. Hunt, supra note 1 at 5.
---------------------------------------------------------------------------

The legislation reforming PUHCA

            The 1935 act has become ineffective and burdensome
    Although the SEC recommended that Congress enact certain 
safeguards to protect consumers, it also outlined many of the 
ways PUHCA's burdensome regulation unnecessarily restricts the 
growth of the registered holding companies, the hundreds of 
exempt companies, and free-standing utility companies. As the 
SEC report illustrates, developments in other areas of the law 
have rendered PUHCA obsolete. For example, PUHCA requires that 
holding companies make frequent disclosures and statements to 
the SEC. While these safeguards may have been necessary in 
1935, now the SEC can effectively protect investors through 
disclosures required under the Securities Act of 1933 and the 
Securities Exchange Act of 1934. PUHCA requires that the SEC 
review many acquisitions and mergers of utility and holding 
companies. The FERC also has jurisdiction to review and approve 
these transactions and in practice, the SEC generally defers to 
the FERC's decisions on competition issues.22 PUHCA 
restricts holding companies from owning utility subsidiaries 
that are not in the same geographic area. The Committee heard 
testimony that the integration requirement is now outdated and 
a barrier to the production of efficient energy.23 
Anticompetitive concerns may be dealt with under the federal 
antitrust laws and assessment of market power concerns during 
merger and acquisition review by the FERC and the 
States.24
---------------------------------------------------------------------------
    \22\ Most state commissions also have the authority to prevent 
mergers that are not in the ``public interest.'' Thirty-three of forty-
three state commissions responding to an SEC survey indicated that they 
have jurisdiction over utility mergers. Thirty responded that they 
regulate the acquisition of utility assets. (Written response to 
questions, Barry P. Barbash, Director, Division of Investment 
Management, Securities and Exchange Commission, Hearing on the Public 
Utility Holding Company Act of 1995: Senate Committee on Banking, 
Housing and Urban Affairs, June 6, 1996.)
    The review of mergers and acquisitions by the FERC and the 
Statesmake PUHCA's merger and acquisition review provisions 
unnecessary. In addition, the diversification provisions of PUHCA are 
unduly burdensome on registered holding companies, exempt holding 
companies and the energy industry in general. As the SEC report 
concludes: ``the [non-utility] diversification restriction limits the 
ability of other companies to enter the utility business. There may be 
companies involved in manufacturing, energy, finance, 
telecommunications or other businesses that would be interested in 
diversifying into the utility industry. There may be substantial 
economies to be achieved by allowing these companies to acquire and 
operate utilities.'' (SEC Study, supra note 5, at 132-133.)
    \23\ In 1935, Congress believed that this ``integration 
requirement'' would improve regulation. For example, PUHCA prevents 
exempt holding companies from expanding and investing--exempt holding 
companies cannot diversify or acquire utilities interstate without 
falling under PUHCA's restrictive registration provisions. Senator 
Johnston testified before the Committee about the burden that the 
geographic limitations impose: ``PUHCA's out-dated geographic 
restrictions don't just apply to a few large companies here and there. 
These geographic restrictions directly circumscribe the investment 
options of 75-80 percent of the investor-owned utility industry.'' 
(Testimony of Senator J. Bennett Johnston, supra note 2, at 2.)
    FERC elaborated that: ``[T]he integration requirement encourages 
geographically contiguous consolidations of electric generation. While 
this was a useful public policy goal when PUHCA was enacted, this 
structural model for the utility industry is today at odds with the 
goals of competition. For a competitive market place to thrive, public 
policy should not encourage heavily concentrated generation markets and 
generation market power by public utilities.'' Written response to 
questions, Susan Tomasky, General Counsel, Federal Energy Regulatory 
Commission, Hearing on the Public Utility Holding Company Act of 1997, 
Senate Committee on Banking, Housing and Urban Affairs, April 29, 1997 
at 4.
    \24\ The SEC report commented that: ``the SEC's review of the 
potential anti-competitive effects of utility acquisitions parallels 
review by the Department of Justice and Federal Trade Commission under 
the federal antitrust laws.'' (Protections are contained in the Hart-
Scott-Rodino, Sherman, and Clayton Acts). (SEC Study, supra note 5, at 
130.)
    FERC Chair Elizabeth Moler testified that the FERC considers the 
effect of the mergers or acquisitions on rates and competition. 
``Market power, which falls under effect on competition, is one of the 
most important factors in analyzing mergers, acquisitions and 
disposition of facilities.'' (Written response to questions, Elizabeth 
Moler, Chair, Federal Energy Regulatory Commission, Hearing on the 
Public Utility Holding Company Act of 1995: Senate Committee on 
Banking, Housing and Urban Affairs, June 6, 1996 at 2.)
    For example, the FERC recently refused to approve a proposed merger 
between Wisconsin Energy Corp. and Northern States Power Co., citing 
concerns about the dominant market power of the proposed new entity. 
The companies then called off the proposed transaction. See, ``Northern 
States and Its Partner Call Off Merger,'' Wall Street Journal, May 19, 
1997.
---------------------------------------------------------------------------
    The Committee considered the SEC report and agreed with its 
conclusion that: ``[g]iven the developments in the industry and 
in other regulatory regimes, a less structural, more targeted 
regulatory approach now seems appropriate.'' 25 In 
crafting the Public Utility Holding Company Act of 1997, the 
Committee followed the SEC's recommendations to repeal PUHCA 
subject to certain conditions. Mindful that consumers need 
protection from unfair rates, the Committee strengthened the 
ability of federal and state regulators to review holding 
company system books and records in connection with ratemaking 
proceedings. S. 621 would address any regulatory gaps opened up 
by PUHCA repeal so that regulators would have ample authority 
to protect consumers.
---------------------------------------------------------------------------
    \25\ SEC Study, supra note 5, at 133.
---------------------------------------------------------------------------
    The SEC testified before the Committee, ``S. 621 largely 
implements the [legislative] option recommended by the SEC, by 
providing the FERC and the state regulators with broad 
authority to inspect books and records of companies in holding 
company systems.'' 26 NARUC testified that ``S. 621 
moves in a positive direction toward rationalizing regulatory 
oversight in an increasingly competitive market.'' 
27
---------------------------------------------------------------------------
    \26\ Testimony of Isaac C. Hunt, SUPRA note 1.
    \27\ Testimony of Robert Gee on behalf of NARUC, Hearing on the 
Public Utility Holding Company Act of 1997: Senate Committee on 
Banking, Housing and Urban Affairs, April 29, 1997 at 3.
---------------------------------------------------------------------------
            Protecting consumers from paying unfair rates
    During the Committee's consideration of PUHCA repeal, the 
regulators, consumers, and industry groups identified as a 
primary concern that repeal could provide utility companies 
with the opportunity to finance acquisitions and 
diversification by increasing energy rates to utility 
customers. According to these groups, the parent holding 
company could fund the operation of its non-utility 
subsidiaries and its diversification through affiliate 
transactions. The parent company would then be able to 
subsidize such non-utility transactions and consumers would end 
up paying for the transaction through higher rates. 
28
---------------------------------------------------------------------------
    \28\ During the Committee's 1996 hearing on PUHCA, this concern was 
most clearly stated in testimony by ELCON: ``[t]he concern here is that 
the potential for self dealing, unfair cost allocation, and cross 
subsidization between regulated and unregulated affiliates to the 
detriment of the captive ratepayers of the regulated affiliate. No 
captive ratepayers of a regulated entity--Whether they be residential, 
small business, or large industrial consumers--should ever be forced to 
subsidize the unregulated, diversified investments of the regulated 
entity's parent company or any unregulated affiliate.'' Testimony of 
John Hughes on behalf of ELCON, Hearing on the Public Utility Holding 
Company Act of 1995: Senate Committee on Banking, Housing and Urban 
Affairs, June 6, 1996, at 7.
    NAUSUCA testified to the Committee that ``[n]o costs associated 
with an off-system investment, or with regulating such an investment to 
protect captive customers, should be borne by ratepayers.'' Testimony 
of Larry Frimerman on behalf of NASUCA, Hearing on the Public Utility 
Holding Company Act of 1997; Senate Committee on Banking, Housing and 
Urban Affairs, April 29, 1997 at 8.
---------------------------------------------------------------------------
    Representatives from the Consumer Federation of America and 
NASUCA testified to the Committee that repeal of PUHCA before 
deregulation of the entire utility industry could lead 
toconsumers paying for non-utility diversification. Both witnesses 
testified that state and federal regulation was not sufficient to 
protect consumers from utility cross subsidization. Mark Cooper for 
Consumer Federation of America testified that ``regulation cannot 
replace PUHCA's structural protections because we do not have a 
comprehensive state-federal scheme of regulation in place in this 
country.'' 29
---------------------------------------------------------------------------
    \29\ Testimony of Mark Cooper on behalf of Consumer Federation of 
America, Hearing on the Public Utility Holding Company Act of 1997; 
Senate Committee on Banking, Housing, and Urban Affairs, April 29, 1997 
at 4.
---------------------------------------------------------------------------
    Larry Frimerman, testifying for NASUCA, had previously 
elaborated that: ``[i]f PUHCA were repealed or substantially 
modified, neither the remaining regulatory framework nor the 
current state of competition would be sufficient to protect 
consumers. Effective regulation must retain both rate and 
structural reviews, with a rational allocation of 
responsibility between state and federal regulators. [T]here 
are substantial gaps and variations in existing state 
regulation of multi-state holding companies. These gaps would 
need to be filled, and current regulatory problems created by 
the Ohio Power and Mississippi Power & Light court decisions 
would need to be corrected prior to Congressional consideration 
of removal of any PUHCA protections.'' 30
---------------------------------------------------------------------------
    \30\ Testimony of Larry Frimerman, on behalf of NASUCA, Hearing on 
the Public Utility Holding Company Act of 1995, Senate Committee on 
Banking, Housing and Urban Affairs, June 6, 1996 at 27.
---------------------------------------------------------------------------
    The Committee considered how best to ensure that the FERC 
and state regulators would be able to prevent the funding of 
non-utility investments through utility rates and unfair 
transactions between utilities and affiliates. The Committee 
followed the regulators' recommendations to prevent unfair 
rates. To enable the FERC and the states to protect consumers, 
the legislation would improve the regulators'' ability to 
determine whether a public utility company may recover in rates 
costs associated with affiliate transactions.
    According to the FERC's testimony before the Committee, S. 
621 would give the FERC authority to protect registered system 
ratepayers against these abusive affiliate 
contracts.31 FERC Chair Elizabeth Moler testified 
that:
---------------------------------------------------------------------------
    \31\ Testimony of Susan Tomasky, General Counsel, Federal Energy 
Regulatory Commission, Hearing on the Public Utility Holding Company 
Act of 1997: Senate Committee on Banking, Housing and Urban Affairs, 
April 29, 1997 at 4-5.

          [T]he new Act would recognize the affiliate abuse 
        protections under otherwise applicable law. These 
        changes, in conjunction with greater access to books 
        and records, would give the FERC broader authority than 
        it now has to protect public utility ratepayers against 
        affiliate abuses. The changes would permit the FERC to 
        protect ratepayers in all types of electric and gas 
        holding company systems and provide additional access 
        to books and records to monitor affiliate 
        abuse.32
---------------------------------------------------------------------------
    \32\ Testimony of Elizabeth Moler, supra note 24, at 17.

---------------------------------------------------------------------------
NARUC testified that S. 621:

          [H]elps to ensure the States' ability to access 
        multi-state holding company books and records, audit 
        multi-state holding companies and regulate affiliate 
        transactions within a holding company system. Also, the 
        provisions pertaining to State access to books and 
        records will go a long way to enable the States to meet 
        their state mandated oversight 
        responsibilities.33
---------------------------------------------------------------------------
    \33\ Testimony of Robert Gee, supra note 27, at 9.

    To further guard against potential affiliate abuse, the SEC 
suggested in its testimony to the Committee that legislation 
include authority for the FERC to pre-approve affiliate 
transactions to ensure that public utilities do not subsidize 
non-utility companies. The Committee, however, intends this 
legislation to allow diversification and promote competition 
with only necessary barriers to entry. The Committee believes 
that preapproval of affiliate transactions would not be 
necessary and would only be burdensome to both the holding 
companies and to the FERC. FERC General Counsel Susan Tomasky 
assured the Committee: ``[C]ross-subsidization can most 
effectively be addressed as a rate issue. The [Federal Energy 
Regulatory] Commission does not need new regulatory powers to 
protect consumers from cross-subsidization of non-utility 
business if PUHCA is repealed and S. 621 is enacted.'' 
34
---------------------------------------------------------------------------
    \34\ Responses to written questions, Elizabeth Moler, supra note 
24, at 3.
---------------------------------------------------------------------------
    The Committee accepted the FERC's assurance that it could 
protect consumers through the rate making process and that 
should it choose to change its policy on this matter the FERC 
has the authority to require preapproval of 
transactions.35 Consequently, the Committee did not 
include a provision requiring preapproval of affiliate 
transactions. In the final analysis, the SEC concurred with the 
Committee, stating that as ``the FERC will be the agency 
charged with administration of the new holding company act and 
we defer to its judgement as to the tools it will need to 
fulfill its regulatory responsibilities.36
---------------------------------------------------------------------------
    \35\ The FERC does not currently make prior approval decisions. In 
response to further Committee inquiry on this issue, the FERC 
elaborated that: ``[w]hile there is nothing that prevents the 
Commission from before-the-fact prudence review, it has thus far 
declines to do so. Prior review requires some measure of speculation 
and is therefore less reliable from a ratepayer protection point of 
view than addressing issues in a rate case where actual coasts can be 
considered. Moreover, the Commission has no special expertise that 
would permit it to evaluate particular business investment decisions. 
Therefore the most effective regualtory safeguard is to ensure that the 
costs and risks of diversification are properly assigned to 
shareholders through the ratemaking process.'' Responses to written 
questions, Susan Tomasky, supra note 23, at 4.
    \36\ Written response to questions, Isaac C. Hunt, Commissioner, 
Securities and Exchange Commission, Hearing on the Public Utility 
Holding Company Act of 1997: Senate Committee on Banking, Housing and 
Urban Affairs, June 6, 1997 at 4.
---------------------------------------------------------------------------
            Closing the Ohio Power gap
    In order to ensure that the FERC and States have 
unqualified authority to disallow costs associated with certain 
affiliate transactions, S. 621 would solve the regulatory 
conundrum caused by a 1992 Court of Appeals decision. In Ohio 
Power Company v. FERC, 954 F2d 779 (D.C. Cir. 1992), the court 
held that the SEC's approval of costs associated with an 
affiliate transaction under PUHCA preempted the FERC's 
determination of whether costs related to that transaction 
should be included in rates. As a result of Ohio Power, the 
FERC must currently allow costs approved by the SEC to be 
passed on to consumers through increases in utility rates even 
if those costs exceed market value.
    The Committee heard testimony from the state regulators 
that Ohio Power could be interpreted in the future to pre-empt 
the States' ability to disallow unfair costs being passed on to 
consumers. Chairman Robert Gee of NARUC testified at the 
Committee's hearing about possible future effects of Ohio Power 
on state authority:

          [The Ohio Power] decision threatens state regulation 
        concerning the costs of interaffiliate transactions 
        sought by the utility to be recovered in retail rates 
        and, accordingly, should be legislatively reversed to 
        ensure that the costs of all non-power transactions 
        between holding company affiliates be subject to review 
        by the appropriate state and federal ratemaking 
        authority. In short, the legislation must clarify 
        unrestricted authority over affiliate 
        transactions.37
---------------------------------------------------------------------------
    \37\ Testimony of Robert Gee, supra note 27, at 6.

    S. 621 would address the Ohio Power problem by increasing 
the energy regulators' ability to protect consumers. S. 621 
would eliminate the Ohio Power regulatory gap by eliminating 
PUHCA and the conflicting jurisdiction over ratemaking between 
the SEC and the FERC. The legislation would grant explicit 
authority to state and federal regulators so that the regulator 
overseeing the ratemaking function has the final say as to 
whether costs associated with an affiliate transaction may or 
may not be fairly passed on to consumers. The Committee does 
not intend the FERC to inherit the SEC's current authority to 
approve costs. Instead, the FERC's authority remains limited to 
wholesale ratemaking.
            Expanding the regulators' access to company books and 
                    records
    The Committee heard testimony from the regulators that the 
most important tool for regulators to keep holding companies 
from passing on non-utility costs to ratepayers is sufficient 
access to company books and records.
    The SEC recommended that if PUHCA were repealed ``Congress 
[must] ensure state access to books and records, and provide 
for federal audit authority and oversight of affiliate 
transactions.'' 38 In her testimony, Susan Tomasky 
stated that ``rate regulation at the federal and state level 
has become the primary means of ensuring ratepayer protection 
against potential abuse of monopoly power by utilities that are 
part of holding company systems.'' 39 FERC Chair 
Elizabeth Moler had testified more specifically about the 
regulators' need for additional books and records authority in 
her 1996 testimony: ``The best way to protect consumers from 
subsidizing non-utility related activities is to * * * ensure 
that federal and state rate regulators have sufficient 
authority, when necessary to protect ratepayers, to inspect the 
books and records of jurisdictional utilities and gas 
companies, any holding company of which that utility or gas 
company is a member, and any associate company within the 
holding company system.'' 40
---------------------------------------------------------------------------
    \38\ SEC Study, supra note 15, at 133-134.
    \39\ Testimony of Susan Tomasky, supra note 31, at 2.
    \40\ Written responses to questions, Elizabeth Moler, supra 24, at 
1.
    The FERC currently has authority to access books and records of 
utility companies; S. 621 would clarify this existing authority to 
ensure that it has full access to all companies in a holding company 
system.
---------------------------------------------------------------------------
    To address the regulators' concerns about books and 
records, the Committee included in S. 621 provisions to 
strengthen the regulators' authority to obtain records of all 
the companies in a holding company system.41 Section 
5 of S. 621 permits the FERC to examine all books and records 
of a holding company and each of its subsidiaries and 
affiliates relevant to costs incurred by a utility company and 
``as necessary or appropriate for the protection of utility 
customers.''
---------------------------------------------------------------------------
    \41\ The legislation would give the FERC additional authority to 
access books and records of all companies in a holding company system. 
The FERC raised a concern at the Committee's hearing that S. 621 not be 
construed to limit existing FERC authority in any way. The Committee 
clarified in section 9 of the legislation that access would supplement 
the FERC's existing ratemaking authority under section 301 of the 
Federal Power Act and section 8 of the Natural Gas Act.
---------------------------------------------------------------------------
    The Committee believes that state regulators must also have 
access to records of all companies in a holding company system, 
no matter what kind of business they are involved in or where 
they are located, in order to set rates, allocate costs, and 
guard against potentially abusive affiliate transactions.
    According to the SEC study, many States are unable to 
obtain readily the books and records of an out-of-state 
company.42 The groups representing manufacturers and 
consumers who testified before the Committee raised concerns 
about the state commissions' inability to regulate the out-of-
state utility operations of multistate companies. The Committee 
addressed these concerns in the legislation. Section 6 of S. 
621 would grant to state commissions access to all the books 
and records of every company in a holding company system, no 
matter where that company is located, to the extent that the 
state commissions need such access to set consumer retail rates 
of a public utility in its jurisdiction. S. 621 also allows any 
federal district court in a state to enforce that state 
commission's access to company books and records.
---------------------------------------------------------------------------
    \42\ SEC Study, supra note 5, at 134.
---------------------------------------------------------------------------
    NARUC testified that it was concerned that the exemption 
authority granted to the FERC in Section 7 not be construed to 
allow federal exemptions from state access to books and 
records.43 The Committee agrees. Section 7 clearly 
limits FERC authority to grant exemptions from federal access 
to books and records under Section 5. The bill does not give 
the FERC authority to exempt holding companies from state 
access to books and records under Section 6. Further, while the 
Committee intends for regulators to have access to books and 
records no matter where they are located in order to set rates, 
it does not intend for this authority to be used outside of a 
ratemaking context. The Committee expects that regulators will 
not have any cause to access books and records of associate or 
subsidiary companies which do not engage in affiliate 
transactions or other business with the public utility.
---------------------------------------------------------------------------
    \43\ Testimony of Robert Gee, supra note 27, at 3-4.
---------------------------------------------------------------------------
    NARUC also indicated to the Committee that it was concerned 
that S. 621's effective date of one year from the enactment of 
the statute would not provide sufficient time for States to 
implement the books and records provision or ``enable States to 
obtain the requisite authorities to effectively oversee multi-
state holding companies if this bill were to be enacted into 
law.'' 44 As a result of these concerns, and to 
assure the continued protection of ratepayers, the Committee 
lengthened the effective date to eighteen months after 
enactment. The Committee believes this additional time will 
afford each state legislature and commission time to implement 
the books and records provision.45
---------------------------------------------------------------------------
    \44\ Id. at 10.
    \45\ A May 2, 1997 memo to the Committee staff from NARUC staff 
indicates that all but 10 of the state legislatures will meet in 1998 
(within 18 months of the Committee report). The Committee will continue 
to consider this issue as the legislation moves towards final passage.
---------------------------------------------------------------------------
            A level playing field for all
    Among other things, the Committee intends for this 
legislation to put all utility companies on a level playing 
field. This left the Committee to deal with the question of how 
to treat the formerly exempt holding companies. FERC General 
Counsel Susan Tomasky suggested in her testimony to the 
Committee that legislation to repeal PUHCA include only narrow 
exemption provisions--which would grandfather previously 
approved activities and transactions but not exempt holding 
companies from affiliate abuse oversight.46 The 
NARUC expressed its concern that legislation not give the FERC 
authority to exempt companies from state books and records 
access. The NARUC testified to the Committee that ``any 
legislation to reform the Holding Company Act should 
unequivocally establish an enforceable State right of access by 
states to all such books and records, wherever located, that 
directly or indirectly affect consumers. States' rights to 
secure access to books and records is critical for the 
effective oversight of out of state activities of multistate 
holding companies that affect utility rates.'' 47
---------------------------------------------------------------------------
    \46\ Testimony of Susan Tomasky, supra note 31, at 3.
    \47\ Testimony of Robert Gee, supra note 27, at 6.
---------------------------------------------------------------------------
    The Committee agrees with the regulators that all holding 
companies should be subject to similar regulation. As a result, 
S. 621 would allow a company to continue to engage in all 
activities and transactions in which it may currently engage. 
Further, all transactions and companies in the holding company 
system--whether currently registered or exempt--would be 
subject to the newly expanded federal books and records 
provisions, unless the FERC finds that a transaction is not 
relevant to its ratemaking jurisdiction.
    The Committee expects that holding companies currently 
exempt under section 3(a)(3) of PUHCA will petition the FERC 
and will be exempted from Section 5 of this Act as long as 
their public utility activities do not fall under the 
definition of jurisdictional rates set forth under this Act. 
Similarly, the Committee expects that state access to the books 
and records of these holding companies will only be used to set 
the retail rates of public utilities which sell power to the 
public.
    Companies that are holding companies only because they own 
any of three specialized energy companies (Exempt Wholesale 
Generators (``EWGs'), Foreign Utility Holding Companies 
(``FUCOs''), and/or Qualified Facilities (``QFs'')) are 
exempted from the federal access to books and records provision 
of S. 621. The Committee recognized that these companies are 
not affiliated with public utilities so there is no possibility 
of affiliate abuse and no need for FERC access to affiliate 
books and records. However, if any of these holding companies 
acquires a public utility, it would lose its exemption. The 
Committee does not intend to change the Public Utility 
Regulatory Policies Act provisions regarding regulation of 
holding companies that hold solely QFs. To maintain current 
state regulation of QFs, the bill exempts companies that are 
holding companies solely by ownership of QFs from the state 
access to books and records provisions of Section 6. This 
exemption would not extend to a holding company which held QFs 
as well as other public utility affiliates.

                              Market Power

    The Committee heard testimony that PUHCA repeal will enable 
companies to merge and form large utility holding-company 
systems. The effect of these mergers would be to reduce the 
number of companies entering a deregulated market, thus 
limiting competition.48 Both state and federal 
regulators addressed merger and diversification issues in their 
testimony.49 The Committee is satisfied that the 
regulators' authority to approve or disapprove mergers and the 
authority of States to set limits on diversification is 
sufficient to protect against market power abuses.
---------------------------------------------------------------------------
    \48\ Larry Frimerman testified that: ``[T]he exercise of market 
power is likely in industry structures that include natural monopolies 
over essential facilities such as transmission and distribution 
systems, or in joint ownership of monopoly and potentially competitive 
businesses. In the electricity industry today, these conditions remain 
* * * If Congress repeals PUHCA and its integration requirement without 
tying relief to a showing of effective competition or divestiture, then 
these very large utility companies can expand their monopoly customer, 
billing, transmission and distribution monopoly at will to ward off 
competitors. This places such utilities at a tremendously unfair 
advantage prior to the onset of competition and will allow the utility 
to acquire other utilities.'' Testimony of Larry Frimerman, supra note 
30, at 8.
    \49\ NARUC testified that: ``the majority of State commissions have 
authority under State law to address transactions in which the 
regulated utility is involved, and some also report that they have 
authority to regulate entry of a utility affiliate into diversified 
lines of business. Problems may arise, however, when merger, 
acquisition or diversification activities occur at a level within the 
holding company system in which the utility subsidiary is not directly 
involved.'' Responses to written questions, Robert Gee, supra note 27 
at 1.
    See further discussion of FERC and state authority, supra notes 22, 
24.
---------------------------------------------------------------------------

  section-by-section analysis of ``the public utility company act of 
                                 1997''

Section 1. Short title

    Section 1 provides that the bill may be cited as the 
``Public Utility Holding Company Act of 1997.''

Section 2. Findings and purposes

    Section 2 sets out the findings and purposes of the Act. 
The ``findings'' of the Act state that the constraints placed 
on public utility holding company systems by the Public Utility 
Holding Company Act of 1935 (the ``1935 Act'') are not needed 
but that there is a continuing need for limited Federal and 
state regulation to protect the ratepayers of electric 
utilities and natural gas companies. The ``purpose'' of the Act 
is to eliminate unnecessary regulation through repeal of the 
1935 Act, while facilitating effective state and Federal rate 
regulation by assuring access to holding company system books 
and records that are relevant to setting utility rates.

Section 3. Definitions

    Section 3 defines the terms used in the Act. The 
definitions of ``affiliate,'' ``associate company,'' 
``company,'' ``electric utility company,'' ``gas utility 
company,'' ``holding company,'' ``public utility company,'' 
``state commission,'' ``subsidiary company'' and ``voting 
security'' are taken from the definitions in Section 2 of the 
Public Utility Holding Company Act of 1935, 15 U.S.C. 
Sec. 79b(a). The Act preserves the threshold of ``10 per cent 
or more'' of outstanding voting securities used by the 1935 Act 
to define a ``holding company'' and a ``subsidiary company''. 
As in the 1935 Act, the alternative definition for these two 
terms (the determination by the regulator that a ``controlling 
influence'' exists) is also used.
    The terms ``exempt wholesale generator'' and ``foreign 
utility company'' have the same meaning as in sections 32 and 
33, respectively, of the 1935 Act as those sections existed on 
the day before the effective date of this Act. These terms were 
added to the 1935 Act by Title VII of the Energy Policy Act of 
1992.
    The terms ``jurisdictional rates'', ``natural gas company'' 
and ``public utility'' are taken from the Natural Gas Act and 
the Federal Power Act. Specifically, the term ``natural gas 
company'' tracks the language of Section 2(6) of the Natural 
Gas Act, 15 U.S.C. Sec. 717a(6). The term ``public utility'' 
tracks that of Section 201(e) of the Federal Power Act, 16 
U.S.C. Sec. 824(e). The term ``jurisdictional rates'' is 
intended to encompass the full ratemaking jurisdiction of the 
Federal Energy Regulatory Commission's authority to set rates 
under the Federal Power and Natural Gas Acts.

Section 4. Repeal of the Public Utility Holding Company Act of 1935

    Section 4 repeals the 1935 Act, effective 18 months after 
the date of enactment of this Act.

Section 5. Federal access to books and records

    Section 5 provides the Federal Energy Regulatory Commission 
authority to inspect such books and records of public utility 
holding companies, associate companies, subsidiary companies 
and affiliate companies as the Commission deems relevant to its 
ratemaking responsibilities under the Federal Power and Natural 
Gas Acts. To this end, companies are required to maintain and 
make available to the Commission such books, accounts, 
memoranda and other records as the Commission deems relevant to 
costs incurred by a public utility or natural gas company. The 
Commission's authority under this section supplements its 
authority over books and records under the Federal Power and 
Natural Gas Acts.
    This section imposes a confidentiality requirement taken 
from the confidentiality requirement in section 301(a) of the 
Federal Power Act. Consistent with current practice under the 
FPA, except as may be directed by the Commission or the courts, 
no member, officer, or employee of the Commission may divulge 
facts or information obtained during the course of examinations 
authorized under this section.

Section 6. State access to books and records

    Section 6 provides state regulatory commissions authority 
to inspect books, accounts, memoranda, and other records of a 
public utility holding company or associate or affiliate 
companies as may be relevant to costs incurred by an electric 
utility company or a natural gas company and necessary to carry 
out state regulation of public utility companies in a holding 
company system. The authority is to be exercised by written 
request and subject to such terms and conditions as are 
necessary and appropriate to safeguard against unwarranted 
disclosure to the public of any trade secrets or sensitive 
commercial information.
    Any company which is a holding company solely because it 
holds Qualifying Facilities under the Public Utility Regulatory 
Policies Act (``PURPA'') is exempt from the books and records 
provision. This exemption is intended to preserve the current 
regulatory structure under PURPA which applies to these 
companies.
    The rights of the states under this section are enforceable 
in federal district court.
    The authority granted by Section 6 is intended to 
supplement existing state authority over holding company 
systems, not to expand or limit any existing authority a state 
commission has to regulate a public utility. To ensure this 
result, Section 6 provides that it does not preempt applicable 
state law concerning access to business information or in any 
way limit the rights of a state to obtain books, records, or 
other information under Federal law, contract, or otherwise. 
Some of these rights are set out in Section 201(g) of the 
Federal Power Act, 16 U.S.C. Sec. 824(g).

Section 7. Exemption authority

    Section 7 provides the Commission authority to exempt 
certain entities from the requirements of Section 5 with 
respect to access to books and records and requires the 
exemption of certain entities from those requirements.
    Section (7)(a) requires the Commission, not later than 90 
days after the effective date of this act, to issue a final 
rule exempting from the requirements of Section 5 any person 
that is a holding company solely by reason of owning one or 
more (a) qualifying facilities (QFs); (b) exempt wholesale 
generators (EWGs); (c) foreign utility companies; or (d) any 
combination thereof.
    The purpose of this provision is to ensure that businesses 
whose activities are solely limited to ownership of these 
categories of generation investment will not be subject to the 
requirements of Section 5. In addition, the Commission may by 
rule or order exempt any person or class of transactions from 
the requirements of Section 5 if it finds that the books, 
records, accounts, memoranda or other records or class of 
transactions are not relevant to the jurisdictional rates of a 
public utility or natural gas company.

Section 8. Affiliate transactions

    Section 8 makes explicit that nothing in the Act precludes 
the Commission or a state commission from determining under 
otherwise applicable law whether a public utility company, 
natural gas company, or a public utility may recover in rates 
any costs of an activity performed by an associate company, or 
any costs of goods or services acquired by the public utility 
company from an associate company.

Section 9. Applicability

    Section 9 makes clear that the Act does not apply to the 
United States, a state or any political subdivision of a state, 
any foreign governmental authority not operating in the United 
States, or any agency, authority, instrumentality, officer, 
agent or employee of these entities.

Section 10. Effect on other regulations

    Section 10 provides that nothing in this Act precludes the 
Commission or a state commission from exercising its 
jurisdiction under otherwise applicable law to protect gas and 
electric utility consumers from paying too much for goods and 
services provided by associate companies and from cross 
subsidization of associate companies by regulated public 
utility companies.

Section 11. Enforcement

    Section 11 refers to authorities contained in the Federal 
Power Act to provide the Commission full authority to enforce 
the provisions of the Act. These include the authority: (i) to 
receive and proceed on complaints; (ii) to investigate any 
facts, conditions, practices or matters necessary to determine 
whether there has been a violation of the Act or any rule, 
regulation or order issued under the Act; and (iii) to hold 
hearings. Section 11 also gives the Commission authority to 
implement rules of practice and procedure and to perform any 
and all acts necessary to carry out the provisions of the Act.

Section 12. Savings provisions

    Section 12 provides that nothing in the Act prohibits a 
person from engaging in activities or transactions in which it 
is legally engaged or authorized to engage on the date of 
enactment.
    This savings provision ensures that prior authorizations 
made by the Securities and Exchange Commission and the Federal 
Energy Regulatory Commission continue in force under this Act. 
However, this Section is also intended to ensure that companies 
are not bound by previously ordered limits on activities when 
the activities would otherwise be allowed by this Act.
    This section also provides that nothing in the Act limits 
the authority of the Commission under the Federal Power Act 
(including section 301 of that Act) or the Natural Gas Act 
(including section 8 of that Act).

Section 13. Implementation

    Section 13 requires the Commission to promulgate such 
regulations as may be necessary or appropriate to implement the 
provisions of this Act, except for provisions pertaining to 
state access to books and records. These regulations are to be 
promulgated not later than eighteen months after the date of 
enactment.
    Section 13 also requires the Commission to submit a report 
to Congress detailing technical and conforming amendments to 
Federal law necessary to implement the provisions of this Act. 
This report is required eighteen months after the date of 
enactment.

Section 14. Transfer of resources

    Section 14 provides for the transfer of relevant books and 
records from the Securities and Exchange Commission to the 
Federal Energy Regulatory Commission.

Section 15. Effective date

    Section 15 provides that the Act shall take effect 18 
months after date of enactment.

Section 16. Authorization of appropriations

    Section 16 authorizes to be appropriated such funds as may 
be necessary to carry out the Act.

Section 17. Conforming amendments

    This section repeals section 318 of the Federal Power Act, 
16 U.S.C. 825q. This section recognizes that repealing the 1935 
Act will eliminate any concerns about the possibility of 
conflicting decisions of the Securities and Exchange Commission 
and the Federal Energy Regulatory Commission.
                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 11, 1997.
Hon. Alfonso M. D'Amato,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. Senate 
        Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 621, the Public 
Utility Holding Company Act of 1997.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Kim Cawley 
and Rachel Forward (for federal costs), Marc Nicole (for the 
state and local impact), and Lesley Frymier (for the private-
sector impact).
            Sincerely,
                                 June E. O'Neill, Director.
    Enclosure.

               congressional budget office cost estimate

S. 621--Public Utility Holding Company Act of 1997

    Summary: The bill would repeal the Public Utility Holding 
Company Act and assign certain new responsibilities to the 
Federal Energy Regulatory Commission (FERC). CBO estimates that 
enacting S. 621 would reduce the need for appropriated funds 
for the Securities and Exchange Commission (SEC) by about $1 
million in fiscal year 1999 and by about $2 million a year 
thereafter. Any additional costs imposed on the FERC would be 
offset by user fees the agency is mandated to charge to 
industries it regulates. The bill would not affect direct 
spending or receipts, so pay-as-you-go procedures would not 
apply. S. 621 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act of 1995 
(UMRA). However, states could incur costs if they choose to 
issue new regulations or pass new legislation in order to fill 
any gaps created by the repeal of the Public Utility Holding 
Company Act of 1935.
    Estimated cost to the Federal Government: Section 4 would 
repeal the Public Utility Holding Company Act, effective 18 
months following enactment of S. 621. Based on information from 
the SEC, CBO estimates that such action would reduce the 
agency's costs by about $1 million in fiscal year 1999 (once 
the repeal is effective), and by about $2 million a year 
thereafter. Discretionary savings would total about $7 million 
over the 1999-2002 period.
    Section 5 would authorize the FERC to have access to any 
records of public utilities and natural gas companies that are 
necessary for the commission to protect customers with respect 
to interstate transactions involving electricity and natural 
gas. Based on information from the FERC, CBO estimates this 
activity would cost the agency about $2 million annually 
starting in 1999. This amount would be offset by fees that the 
agency is required to charge the industries it regulates. 
Therefore, the new responsibilities that the bill would create 
for the FERC would have no net budgetary impact.
    The effects of this legislation fall within budget 
functions 270 (energy) and 370 (commerce and housing credit).
    Pay-as-you-go consideration: None.
    Estimated impact on State, local, and Tribal Government: S. 
621 contains no intergovernmental mandates as defined in UMRA. 
However, states could incur costs if they choose to issue new 
regulations or pass new legislation in order to fill any gaps 
created by the repeal of the Public Utility Holding Company Act 
of 1935.
    Estimated impact on the private sector: S. 621 would impose 
no new private-sector mandates as defined in UMRA. The bill 
would transfer regulatory authority for business-related 
transactions of public utility holding companies from the 
Securities and Exchange Commission to the Federal Energy 
Regulatory Commission and state regulators. Moreover, the bill 
would terminate current requirements to report extensive 
financial data to the SEC and would require only that federal 
and state regulators have access to books, accounts, and other 
records of all companies in the public utility holding company 
system. S. 621 also would exempt certain independent power 
producers, wholesale generators, and foreign utilities from 
having to make these data available to regulatory authorities.
    Estimate Prepared by: Federal Costs: Kim Cawley and Rachel 
Forward; Impact on State, Local, and Tribal Governments: Marc 
Nicole; and Impact on the Private Sector: Lesley Frymier.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

                                
