[Senate Report 107-15]
[From the U.S. Government Publishing Office]



                                                        Calendar No. 36
107th Congress 
 1st Session                     SENATE                          Report
                                                                 107-15
_______________________________________________________________________

                                     


                       THE PUBLIC UTILITY HOLDING

                          COMPANY ACT OF 2001

                               __________

                              R E P O R T

                                 OF THE

                     COMMITTEE ON BANKING, HOUSING,

                           AND URBAN AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                 S. 206

                             together with

                            ADDITIONAL VIEWS




                  May 9, 2001.--Ordered to be printed
                                     

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah              CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                ZELL MILLER, Georgia
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada                  DEBBIE STABENOW, Michigan
                                     JON S. CORZINE, New Jersey

                   Wayne A. Abernathy, Staff Director
     Steven B. Harris, Democratic Staff Director and Chief Counsel
                      Linda L. Lord, Chief Counsel
                        Stacie Thomas, Economist
                 Dean V. Shahinian, Democratic Counsel
                       George E. Whittle, Editor

                            C O N T E N T S

                              ----------                              
                                                                   Page

Introduction.....................................................     1
History of the Legislation.......................................     2
Purpose and Summary..............................................     2
Purpose and Scope................................................     4
    Background...................................................     4
        The ``unregulated'' energy industry......................     4
        The new regulatory regime--The Public Utility Holding 
          Company Act of 1935....................................     4
        The studies begin a twenty-year debate on PUHCA..........     5
        SEC study triggers new Committee action..................     7
    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...............................    10
        Expanding the regulators' access to company books and 
          records................................................    11
        A level playing field for all............................    12
        Market power.............................................    13
Section-by-Section Analysis of ``The Public Utility Company Act 
  of 2001''......................................................    13
    Section 1. Short title.......................................    13
    Section 2. Findings and purposes.............................    13
    Section 3. Definitions.......................................    13
    Section 4. Repeal of the Public Utility Holding Company Act 
      of 1935....................................................    14
    Section 5. Federal access to books and records...............    14
    Section 6. State access to books and records.................    14
    Section 7. Exemption authority...............................    15
    Section 8. Affiliate transactions............................    15
    Section 9. Applicability.....................................    16
    Section 10. Effect on other regulations......................    16
    Section 11. Enforcement......................................    16
    Section 12. Savings provisions...............................    16
    Section 13. Implementation...................................    16
    Section 14. Transfer of resources............................    17
    Section 15. Inter-agency review of competition in the 
      wholesale and retail markets for electric energy...........    17
    Section 16. GAO study on implementation......................    17
    Section 17. Effective date...................................    17
    Section 18. Authorization of appropriations..................    17
    Section 19. Conforming amendments............................    17
Regulatory Impact Statement......................................    17
Congressional Budget Office Cost Estimate........................    17
Changes in Existing Law..........................................    19
Additional views of Senator Enzi.................................    20
Additional views of Senators Enzi and Sarbanes...................    23

                                                        Calendar No. 36
107th Congress                                                   Report
                                 SENATE
 1st Session                                                     107-15

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



 
             THE PUBLIC UTILITY HOLDING COMPANY ACT OF 2001

                                _______
                                

                  May 9, 2001.--Ordered to be printed

                                _______
                                

 Mr. Gramm, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 206]

    The Committee on Banking, Housing, and Urban Affairs to 
which was referred the bill (S. 206), to repeal the Public 
Utility Holding Company Act of 1935, to enact the Public 
Utility Holding Company Act of 2001, and for other purposes, 
having considered the same, reports favorably thereon and 
recommends that the bill do pass.

                              INTRODUCTION

    On April 24, 2001, the Senate Committee on Banking, 
Housing, and Urban Affairs met in legislative session and 
marked up and ordered to be reported S. 206, a bill to repeal 
the Public Utility Holding Company Act of 1935 (``PUHCA'') and 
to enact the Public Utility Holding Company Act of 2001, and 
for other purposes, with a recommendation that the bill do 
pass. The Committee adopted by unanimous consent an amendment 
sponsored by Senator Enzi, and adopted by voice vote an 
amendment in the second degree to that amendment sponsored by 
Senators Enzi and Sarbanes. The Committee also adopted by voice 
vote an amendment sponsored by Senator Corzine. The Committee's 
action to report the bill was taken by a recorded vote. All 
Senators, except for Senator Stabenow, voted in the 
affirmative. Senator Stabenow voted in the negative.

                       HISTORY OF THE LEGISLATION

    The Public Utility Holding Company Act of 2001, S. 206, was 
introduced on January 30, 2001 by Senators Shelby, Murkowski, 
Gramm, Dodd, Sarbanes, Lott, Craig and Crapo. Senators 
Brownback, Cochran, Bunning and Nickles were added as 
additional cosponsors. The legislation introduced was 
substantively identical to S. 313, the ``Public Utility Holding 
Company Act of 1999,'' which was reported by the Banking 
Committee on February 11, 1999.\1\ S. 206 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.
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    \1\ Only technical changes were made to the text of S. 313 prior to 
the bill being reintroduced as S. 206 in the 107th Congress.
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    The full Committee conducted a legislative hearing to 
consider S. 206 on March 29, 2001. The Committee received 
testimony from: the Honorable Isaac Hunt, Jr., Commissioner, 
Securities and Exchange Commission (``SEC''); Cynthia A. 
Marlette, Deputy General Counsel, Federal Energy Regulatory 
Commission (``FERC''); David L. Sokol, Chairman and CEO, Mid-
American Energy Holdings Company; David M. Sparby, Vice 
President, Government and Regulatory Affairs, Xcel Energy Inc.; 
and Charles A. Acquard, Executive Director of the National 
Association of State Utility Consumer Advocates (``NASUCA'').

                          PURPOSE AND SUMMARY

    The bill reported by the Committee would repeal PUHCA. In 
the 66 years since PUHCA became law, the nature of the utility 
industry changed, state and Federal governments implemented 
regulatory controls, and Congress enacted federal energy laws 
and Federal securities laws--all of which now more than 
adequately protect consumers and utility rate payers. In light 
of these developments, PUHCA no longer serves its original 
purpose of restructuring the energy industry and protecting 
investors and consumers from holding company abuses and 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.'' \2\ Therefore, ``the SEC has recommended, and 
continues to recommend, that Congress repeal the 1935 (PUHCA) 
Act.'' \3\
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    \2\ Statement of Isaac C. Hunt, Jr., Commissioner, Securities and 
Exchange Commission: ``Hearing on the Public Utility Holding Company 
Act of 2001,'' Senate Committee on Banking, Housing, and Urban Affairs, 
Subcommittee on Securities and Investment, March 29, 2001 at 2.
    \3\ Id. at 5.
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    The Committee recognizes that repealing PUHCA not only 
streamlines regulation, but would also facilitate efforts to 
achieve competitive markets in the energy industry. Truly 
competitive energy markets are going to require significant 
capital investment. However, PUHCA inhibits investment and 
precludes financially sound firms from participating in the 
energy markets. It is the Committee's view that repealing PUHCA 
would attract new market participants, stimulate investment, 
and ultimately engender greater competition to the benefit of 
consumers.
    Perhaps most importantly, S. 206 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. 206 does 
not in any way diminish the authority provided to the FERC by 
the Federal Power Act to protect ratepayers. In fact, S. 206 
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 more 
effectively protect ratepayers by addressing a problem created 
by the decision of the Court of Appeals for the District of 
Columbia Circuit Court in Ohio Power Company v. FERC \4\ 
(``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 puts into question the 
states' ratemaking authority. S. 206 would remove the SEC from 
the ratemaking process and establish that the FERC (and 
implicitly the states) maintain full ratemaking authority.
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    \4\ Ohio Power Company v. FERC, 954 F.2d 779 ( D.C. Cir. 1992).
---------------------------------------------------------------------------
    S. 206 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 utility commissions access to books and records of all 
utility holding companies, their associates, affiliates, and 
subsidiaries, that are relevant to the determination of 
rates.\5\ 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.
---------------------------------------------------------------------------
    \5\ 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.
---------------------------------------------------------------------------
    Due to some broader concerns raised about competition 
within the energy markets, the Committee adopted two amendments 
which call for studies of the markets. Specifically, S. 206 
would establish an interagency task force composed of members 
from the Department of Justice, FERC, the Federal Trade 
Commission, the Department of Agriculture and the Securities 
Exchange Commission to study competition within the wholesale 
and retail markets for electric energy in the United States. 
The scope of the study is to encompass all retail and wholesale 
electric energy market participants. Additionally, the bill 
requires the Comptroller General to study the success of the 
Federal Government and the states in preventing anticompetitive 
practices, market-power abuses and promoting competition within 
the energy markets. Notwithstanding the Committee's interest in 
obtaining information about the condition of the national 
energy markets, the Committee continues to believe that the 
debate on comprehensive energy reform should be reserved for 
the Energy and Natural Resources Committee.

                           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.\6\ As a result of 
this rapid growth, industry power was concentrated among a 
handful of large interstate holding company systems.\7\
---------------------------------------------------------------------------
    \6\ SEC Study, ``Regulation of Public Utility Holding Companies, 
Division of Investment Management,'' June 1999 (``SEC Study'') at 1.
    \7\ Id. at 3.
---------------------------------------------------------------------------
    In the late 1920's, at Congress' 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 these 
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.\8\
---------------------------------------------------------------------------
    \8\ 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 companies' 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.\9\
---------------------------------------------------------------------------
    \9\ Id. at 2.
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            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 the 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.\10\
---------------------------------------------------------------------------
    \10\ 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.
---------------------------------------------------------------------------
    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.\11\ Prior SEC approval was required for certain 
corporate transactions engaged in by registered holding 
companies such as: securities issued, utility assets acquired, 
and some merger activities. Restrictions against interaffiliate 
loans and diversification into non-utility businesses were also 
imposed. PUHCA also subjected registered holding companies to 
extensive reporting and accounting requirements. As of December 
31, 2000 there were 26 registered holding companies that own 
214 electric and gas utility subsidiaries, with operations in 
44 states, and in excess of 1,500 non-utility subsidiaries. 
Registered holding companies represent over 40% of the assets 
and revenues of the U.S. investor-owned electric utility 
industry, and almost 50% of all electric utility customers in 
the United States.\12\
---------------------------------------------------------------------------
    \11\ Id. at 7, 8. The companies are referred to as ``registered 
utility holding companies'' since they come within the purview of 
PUHCA. At the time of the study, there were 19 registered holding 
companies. 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. See, CRS Report, ``The 
Public Utility Holding Company Act of 1935: Legislative History, 
Background and Recent Amendments,'' 93-266 A. at 2.
    \12\ Statement of Commissioner Isaac C. Hunt, Jr., supra note 2 at 
3, n. 3.
---------------------------------------------------------------------------
            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-five 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 1977, the General Accounting Office (the ``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 may need to 
reform PUHCA, the GAO included in its recommendations that the 
SEC undertake a complete study on PUHCA.\14\
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    \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.'' See, GAO Report to Congress FGMSD-77-35, June 
20, 1977.
    \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 Alfonse 
D'Amato, (R-NY), then Chairman of the Securities Subcommittee 
of the Banking Committee, and Senator J. Bennett Johnston, (D-
LA), 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\
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    \15\ CRS Report, ``Electricity Restructuring Background: Public 
Utility Holding Company Act of 1935 (PUHCA),'' Jan. 7, 1999 at 5.
    \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 unnecessary impediments 
to the exercise of sound and prudent business judgment 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 
at 28357).
    \17\ Statement of Senator Alfonse D'Amato, November 19, 1981, 
Congressional Record at 28357.
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    In 1983, the GAO responded to the SEC's recommendations and 
to Senators D'Amato and Johnston's legislation by issuing yet 
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\
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    \18\ GAO Report, ``Analysis of SEC's Recommendation to Repeal the 
Public Utility Holding Company Act,'' GAO/RCED-83-118, August 30, 1983, 
at I-v.
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    The Committee convened a hearing regarding PUHCA reform on 
June 14 and 15, 1983, but took no further action during that 
legislative session.
    During the 20-year debate on PUHCA reform, Congress 
successfully enacted piecemeal 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 1986, Congress enacted the 
``Regulatory Fairness Act'' that added additional protections 
to consumers who feared wholesale utility companies were 
including unjust charges in utility rates. 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 had the opportunity to accomplish comprehensive 
reform of the Act itself.
            SEC study triggers new 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.
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    \19\ SEC Study, supra note 6, at 128-133.
---------------------------------------------------------------------------
    The SEC report recommended that Congress repeal PUHCA 
(subject to certain conditions) since ``the current regulatory 
system imposes significant costs, indirect 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 C. Hunt, Jr. cautioned:
---------------------------------------------------------------------------
    \20\ SEC Study, supra note 6, at x.

          There is a continuing risk that a monopoly, if left 
        unguarded, could charge higher rates and use the 
        additional funds to subsidize affiliated businesses in 
        order to boost its competitive position in other 
        markets. Thus, so long as electric and gas utilities 
        continue to function as monopolies, the need to protect 
        against this type of cross-subsidization will remain. . 
        . . [T]he best means of guarding against cross-
        subsidization is likely to be audits of books and 
        records and Federal oversight of affiliate 
        transactions.\21\
---------------------------------------------------------------------------
    \21\ Statement of Commissioner Isaac C. Hunt, Jr., supra note 2 at 
6.
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The legislation reforming PUHCA

            The 1935 act has become ineffective and burdensome
    Although the SEC recommended 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 Study 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, 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\
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    \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 at 2.)
---------------------------------------------------------------------------
    The Committee also heard testimony that PUHCA's 
restrictions preventing holding companies from owning utility 
subsidiaries that are not in the same geographic area may be an 
impediment to needed market protections and restructuring in 
California and across the United States. Also, this so-called 
integration requirement is outdated and a barrier to the 
production of efficient energy.\23\ It has prevented at least 
one AAA bond rated holding company from investing in 
California's electricity generation and transmission 
infrastructure as the company feared it would have violated 
provisions under PUHCA.\24\ The integration requirement may 
also prevent FERC from implementing key market power mitigation 
efforts called for in FERC Order 2000 \25\ such as the creation 
of independent regional transmission organizations (RTO).\26\
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    \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 J. 
Bennett Johnston, (D-LA), 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: ``Hearing on the 
Public Utility Holding Company Act of 1995,'' Senate Committee on 
Banking, Housing and Urban Affairs, June 6, 1996 at 2.)
    \24\ Statement of David L. Sokol, Chairman and CEO, MidAmerican 
Energy Holding Company: ``Hearing on the Public Utility Holding Company 
Act of 2001,'' Senate Committee on Banking, Housing, and Urban Affairs, 
Subcommittee on Securities and Investment, March 29, 2001 at 4-5. 
MidAmerican, is a diversified, international energy corporation 
headquartered in Des Moines, Iowa. MidAmerican is currently exempt from 
PUHCA because the majority of its utility holdings are located in one 
state. Had the company invested in California markets it would have 
been required to separate itself from its largest shareholder, 
Berkshire Hathaway.
    \25\ 95 FERC 61, 114.
    \26\ Statement of Cynthia A. Marlette, Deputy General Counsel, 
Federal Energy Regulatory Commission: ``Hearing on ``Public Utility 
Company Holding Act of 2001,'' Senate Committee on Banking, Housing, 
and Urban Affairs, Subcommittee on Securities and Investment, March 29, 
2001 at 5-6. ``It is RTOs that will provide the major structural reform 
needed in the electric industry to ensure mitigation of market power 
and an efficient, reliable transmission system . . . Under PUHCA, an 
entity that owns or controls facilities used for the transmission of 
electric energy--such as an RTO--falls within the definition of public 
utility company, and any owner of ten percent or more of such a company 
would be a holding company and potentially could be required to become 
a registered holding company. This could serve as a significant 
disincentive for investments in independent for-profit transcos that 
qualify as RTOs.'' Id.
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    At its March 29, 2001 hearing, the Committee heard 
testimony that PUHCA may have marginally contributed to 
electricity shortages, price increases and rolling blackouts 
suffered by California utilities and rate payers during the 
2000-2001 winter season by limiting the pool of investors that 
may have been interested in developing electricity generation 
and transmission in California. According to SEC Commissioner 
Hunt, ``[PUHCA] certainly possibly could have limited the 
number of investors willing to go into the California scene.''
    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.'' \27\ Mindful that 
consumers need protection from unfair rates, the Committee, in 
crafting S. 206, strengthened the ability of Federal and state 
regulators to protect consumers from unfair rate increases and 
drafted the bill to address any regulatory gaps opened up by 
PUHCA repeal so that regulators would have ample authority to 
protect consumers.
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    \27\ SEC Study, supra note 6, at 133.
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            Protecting consumers from paying unfair rates
    During the Committee's consideration of PUHCA repeal, the 
regulators, consumers, and industry groups identified as their 
primary concern that repeal could provide utility companies 
with the opportunity to finance 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\
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    \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.)
---------------------------------------------------------------------------
    Charles A. Acquard, Executive Director of the National 
Association of State Utility Consumer Advocates (NASUCA) 
testified to the Committee that the repeal of PUHCA before 
public utility companies are subject to effective competition, 
or effective regulation where effective competition does not 
exist, could leave consumers unprotected from artificially 
inflated prices caused by monopoly abuses by very large utility 
companies.\29\ NASUCA also contends that the repeal or easing 
of restrictions on utility diversification will make it more 
difficult for regulators to track and allocate costs in order 
to prevent the cross-subsidization of the parent holding 
company's non-utility subsidiaries by overcharging 
ratepayers.\30\
---------------------------------------------------------------------------
    \29\ Statement of Charles A. Acquard: ``Hearing on Public Utility 
Holding Company Act of 2001,'' Senate Committee on Banking, Housing, 
and Urban Affairs, Subcommittee on Securities and Investment, March 29, 
2001 at 2 and 4.
    \30\ Id. at 5.
---------------------------------------------------------------------------
    NASUCA has concluded that if PUHCA were repealed today, 
neither the current state nor Federal regulatory scheme, nor 
the current state of competition, would be sufficient to 
protect consumers.\31\ If PUHCA is repealed, NASUCA would like 
to see the continuation of the Act's restrictions on public 
utility holding company diversification into non-utility 
businesses and its regulations on capital structure.\32\
---------------------------------------------------------------------------
    \31\ Id at 8-9.
    \32\ Id. at 5.
---------------------------------------------------------------------------
    The Committee considered how to best ensure that the FERC 
and state regulators would be able to prevent the funding of 
non-utility investments through utility rates and other unfair 
affiliate transactions. The Committee followed the regulators' 
recommendations to prevent unfair rates. To enable the FERC and 
the states to best 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.
    The Committee also addressed concerns over the ability of 
companies to pass through costs to rate customers from 
affiliate transactions by affirmatively noting the existing 
role of FERC in regulating wholesale electricity rates. 
According to the FERC's testimony before the Committee, S. 206 
would give the FERC authority to protect registered system 
ratepayers against these abusive affiliate contracts. FERC 
Deputy General Counsel Cynthia Marlette, testified that: ``S. 
206 provides an appropriate means to help promote emerging 
competitive electric power markets while at the same time 
providing the FERC and states additional access to books and 
records in order to protect consumers against inappropriate 
cross-subsidization and market power abuse.'' \33\ The 
Committee accepted the FERC's assurance that it could protect 
consumers through the ratemaking process and adopted an 
amendment offered by Senators Enzi and Sarbanes, emphasizing 
the continuation of FERC's authority to require that 
jurisdictional rates are just and reasonable, including the 
ability to deny or approve the passthrough of costs and the 
prevention of cross-subsidization and the promulgation of such 
rules and regulations as are necessary or appropriate for the 
protection of utility consumers.
---------------------------------------------------------------------------
    \33\ Statement of Cynthia Marlette, supra note 26 at 8.
---------------------------------------------------------------------------
    Indeed, prior to adoption of the Enzi-Sarbanes amendment, 
SEC Commissioner Hunt testified that ``S. 206 represents * * * 
the type of conditional repeal that the SEC has endorsed. In 
particular, S. 206 would provide the FERC with the right to 
examine books and records of holding companies and their 
affiliates that are relevant to costs incurred by associate 
utility companies, in order to protect ratepayers. * * * S. 206 
thus accomplishes many of the goals of the conditional repeal 
advocated by the SEC.'' \34\
---------------------------------------------------------------------------
    \34\ Statement of Commissioner Isaac C. Hunt, Jr., supra note 2 at 
7.
---------------------------------------------------------------------------
            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. 206 would solve the regulatory 
conundrum caused by a 1992 Court of Appeals decision, in Ohio 
Power Company v. FERC, 954 F.2d 779 (D.C. Cir. 1992). In Ohio 
Power, 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 allow costs approved by the SEC to be 
passed on to consumers through increases in utility rates, even 
if those costs exceed market value.
    S. 206 would address the Ohio Power problem by increasing 
the energy regulators' ability to protect consumers. S. 206 
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 explicitly grant 
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 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.'' \35\
---------------------------------------------------------------------------
    \35\ SEC Study supra note 6, at 133-134.
---------------------------------------------------------------------------
    Cynthia Marlette also testified that ``Congress should 
ensure that the FERC and state regulatory authorities have 
adequate access to the books and records of all members of all 
public utility holding company systems when that information is 
necessary to meet their statutory rate-making 
responsibilities.'' \36\
---------------------------------------------------------------------------
    \36\ Statement of Cynthia Marlette, supra note 26 at 3.
---------------------------------------------------------------------------
    To address the regulators' concerns about books and 
records, the Committee included in S. 206 provisions to 
strengthen the regulators' authority to obtain records of all 
the companies in a holding company system.\37\
---------------------------------------------------------------------------
    \37\ The legislation would give the FERC additional authority to 
access books and records of all companies in a holding company system. 
The Committee clarifies 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.
---------------------------------------------------------------------------
    Section 5 of S. 206 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.''
    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, 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.\38\
---------------------------------------------------------------------------
    \38\ SEC Study, supra note 6, at 134.
---------------------------------------------------------------------------
    The groups representing manufacturers and consumers who 
testified before the Committee in the past 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. 
206 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. 206 also allows any 
Federal district court in a state to enforce that state 
commission's access to company books and records. In addition, 
Section 15 of S. 206 creates an inter-agency task force to 
review competition in the wholesale and retail markets for 
electricity. The task force must report its findings to 
Congress no later than one year after enactment of S. 206.
    NARUC testified in an earlier hearing 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.\39\ The Committee continues to agree. 
Section 7 clearly limits FERC authority to grant exemptions 
from federal access to books and records under Section 5. The 
bill does not give 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 
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.
---------------------------------------------------------------------------
    \39\ Statement 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 3-4.
---------------------------------------------------------------------------
            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. In 1997, 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.\40\
---------------------------------------------------------------------------
    \40\ Statement of Susan Tomasky, General Counsel, FERC: ``Hearing 
on the Public Utility Holding Company Act of 1997,'' Senate Committee 
on Banking, Housing, and Urban Affairs, April 29, 1997 at 3.
---------------------------------------------------------------------------
    The NARUC, in an earlier hearing, 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.'' \41\
---------------------------------------------------------------------------
    \41\ Statement of Robert Gee, supra note 39 at 6.
---------------------------------------------------------------------------
    The Committee agrees with the regulators that all holding 
companies should be subject to similar regulation. As a result, 
S. 206 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 which 
currently hold exemptions 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 books and records provision of S. 206. 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 with PUHCA repeal 
companies would merge to 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.\42\
---------------------------------------------------------------------------
    \42\ Statement of Commissioner Isaac C. Hunt, Jr., supra note 2 at 
7; statement of Charles A. Acquard, supra note 29 at 7.
---------------------------------------------------------------------------
    Both state and Federal regulators addressed merger and 
diversification issues in their testimony. 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.

                      SECTION-BY-SECTION ANALYSIS

Section 1. Short title

    Section 1 provides that the bill may be cited as the 
``Public Utility Holding Company Act of 2001.''

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 holding company systems by the Public Utility Holding 
Company Act of 1935 (the ``1935 Act'') are not needed but that 
there is 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 ``10 percent or more'' 
threshold 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.

Section 5. Federal access to books and records

    Section 5 provides the Federal Energy Regulatory Commission 
authority to inspect such books and records of 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 
rate setting. 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 gas utility company 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 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 which these companies operate.
    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(a) clarifies that the Commission's authority to 
require that jurisdictional rates are just and reasonable, 
including the ability to approve or deny the pass-through of 
costs, the prevention of cross-subsidization, and the 
promulgation of rules necessary or appropriate for the 
protection of utility customers, are not affected by the Act.
    Section 8(b) 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, unless specifically provided in 
the Act, 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 authorities 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, in general, 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. Inter-agency review of competition in the wholesale and 
        retail markets for electric energy

    Section 15 establishes the Electric Energy Market 
Competition Task Force, comprised of appointees from the 
Department of Justice, the Federal Energy Regulatory 
Commission, the Federal Trade Commission, the Department of 
Agriculture's Rural Utility Service, and the Securities and 
Exchange Commission. The task force is required to report to 
Congress within one year following the date of enactment on 
competition in the wholesale and retail markets for electric 
energy.

Section 16. GAO study on implementation

    Section 16 requires the GAO to report to the Congress no 
later than 24 months following the date of enactment of the Act 
on the effectiveness of the Federal Government and the states 
to (1) prevent anti-competitive practices by public utility 
holding companies; and (2) promote competition and efficient 
energy markets to the benefit of consumers.

Section 17. Effective date

    Section 17 provides that the Act shall take effect 18 
months after date of enactment.

Section 18. Authorization of appropriations

    Section 18 authorizes to be appropriated funds necessary to 
carry out the Act.

Section 19. 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.

                      REGULATORY IMPACT STATEMENT

    In accordance with Paragraph 11(g), rule XXVI of the 
Standing Rules of the Senate, the Committee makes the following 
statement regarding the regulatory impact of the bill.
    The chief effect of the legislation will be to eliminate 
the role of the Securities and Exchange Commission for 
administration of the Public Utility Holding Company Act, and 
invest remaining duties under the Public Utility Holding 
Company Act of 2001 in the Federal Energy Regulatory 
Commission. It is expected that this will result in a net 
reduction in regulatory burden.

               CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

    Senate rule XXVI, Section 11(b) of the Standing Rules of 
the Senate, and Section 403 of the Congressional Budget 
Impoundment and Control Act, require that each committee report 
on a bill containing a statement estimating the cost of the 
proposed legislation, which was prepared by the Congressional 
Budget Office. The Congressional Budget Office Cost Estimate 
and its Estimate of Costs of Private-Sector Mandates, both 
dated April 24, 2001, are hereby included in this report.

                                     U.S. Congress,
                               Congressional Budget Office,
                                       Washington, DC, May 1, 2001.
Hon. Phil Gramm,
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. 206, the Public 
Utility Holding Company Act of 2001.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Lisa Cash 
Driskill and Ken Johnson (for federal costs), Victoria Heid 
Hall (for the state and local impact), and Lauren Marks (for 
the private-sector impact).
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

S. 206--Public Utility Holding Company Act of 2001

    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. 206 would reduce the need for appropriated funds 
for the Securities and Exchange Commission (SEC) by about $2 
million in fiscal year 2003 and by about $3 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. S. 206 also would require the General 
Accounting Office (GAO) and an interagency task force to 
perform studies on competition within the electricity industry. 
Subject to the availability of appropriated funds, CBO 
estimates such studies would cost about $500,000 over the 2002-
2003 period.
    The bill would not affect direct spending or receipts, so 
pay-as-you-go procedures would not apply. S. 206 contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act (UMRA).
    Estimated cost to the Federal Government: Section 4 would 
repeal the Public Utility Holding Company Act, effective 18 
months following enactment of S. 206. Based on information from 
the SEC, CBO estimates that this repeal would reduce the 
agency's costs by about $2 million in fiscal year 2003 and by 
about $3 million a year thereafter, assuming the necessary 
appropriation action. Discretionary savings would total about 
$11 million over the 2002-2006 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 utility 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 $3 million annually 
starting in 2003. 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 bill also would require the establishment of an 
interagency task force that would review competition within the 
electricity industry and report to the Congress within one 
year. CBO estimates that this study would cost about $250,000, 
assuming the appropriation of the necessary amounts.
    GAO would be required to perform a study on the success of 
the federal government and the states in preventing 
anticompetitive practices and promoting competition within the 
electricity industry. Such a report would be due to the 
Congress between 18 and 24 months following the bill's 
enactment. Based on information from GAO, CBO estimates that 
completing this study would cost about $250,000, assuming 
appropriation of the necessary amounts.
    The effects of this legislation fall within budget 
functions 270 (energy) and 370 (commerce and housing credit).
    Pay-as-you-go considerations: None.
    Estimated impact on state, local, and tribal governments: 
S. 206 contains no intergovernmental mandates as defined in 
UMRA. States could incur costs, however, if they choose to 
issue new regulations or enact new legislation to fill any 
regulatory gaps created by the repeal of the Public Utility 
Holding Company Act.
    Estimated impact on the private sector: S. 206 would impose 
no new private-sector mandates as defined in UMRA. The bill 
would transfer regulatory authority for certain business-
related transactions of public utility holding companies from 
the Securities and Exchange Commission to the Federal Energy 
Regulatory Commission.
    Estimate prepared by: Federal Costs: Lisa Cash Driskill and 
Ken Johnson. Impact on State, Local, and Tribal Governments: 
Victoria Heid Hall. Impact on the Private Sector: Lauren Marks.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                        changes in existing law

    In the opinion of the Committee, it is necessary to 
dispense with the requirement of Section 12 of rule XXVI of the 
Standing Rules of the Senate in order to expedite the business 
of the Senate.

                            ADDITIONAL VIEWS

    Efforts at opening a dialogue with the opposing views on S. 
206, the Public Utility Holding Company Act of 1935 (PUHCA), 
have shown that a mutually-agreeable solution is not 
inconceivable and is highly possible. The only limitations that 
remain would involve intractability on the part of one or more 
of the negotiating participants.
    Congress has not concurred outside of the interests of the 
committee of jurisdiction for the past 20 years over PUHCA 
repeal. Significant opposition raised by the rural electric 
cooperatives and the public power organizations including 
municipal power authorities, has proved successful enough to 
block almost every legislative effort to move the bill beyond 
passage out of the Senate Committee on Banking, Housing, and 
Urban Affairs. Problems in California's electric market, rising 
fuel costs, an aging electricity infrastructure, and threats to 
international energy supplies have drawn national attention to 
the absence of a comprehensive energy policy. This heightened 
awareness of our energy needs has renewed interest in providing 
wholesale and retail electric energy markets with the tools 
necessary to address the United States' energy demands in the 
21st Century.
    At a March 29, 2001 hearing on S. 206, the Public Utility 
Holding Company Act of 2001, before the Senate Banking 
Subcommittee on Securities and Investments which I chair, 
several witnesses testified that PUHCA's antiquated and 
redundant regulations have barred companies and investors from 
investing in upgrades for California's electricity 
infrastructure. Cynthia Marlette, the Federal Energy Regulatory 
Commission's (FERC) Deputy General Counsel stated that PUHCA is 
also an impediment to entities being able to invest in 
independent regional transmission organizations (RTO), a market 
structure remedy that FERC believes is ``the key to mitigating 
the major market power of vertically-integrated electric 
utilities, improving reliability of the transmission grid, and 
assuring more efficient use of our transmission facilities.'' 
(Statement of Cynthia A. Marlette, Deputy General Counsel, 
Federal Energy Regulatory Commission: Hearing on ``Public 
Utility Company Holding Act of 2001,'' Senate Banking 
Subcommittee on Securities and Investment, March 29, 2001.)
    In spite of these acknowledged obstacles to investment in 
the electric industry, and PUHCA repeal endorsements by both 
FERC and the Securities and Exchange Commission (SEC), PUHCA 
repeal opponents have consistently opposed PUHCA legislation 
based on a policy that PUHCA repeal should not occur without 
adequate market protections in place to fill the void created 
in a PUHCA-free energy market. Charles A. Acquard, Executive 
Director of the National Association of State Utility Consumer 
Advocates (NASUCA) testified that ``NASUCA urges Congress and 
the SEC not to take any action that would weaken [PUHCA] 
without first ensuring that public utility holding companies 
are either subject to effective competition or subject to 
effective regulation, where effective competition does not yet 
exist or where competition would not induce efficiency, reduce 
costs and advance consumer interests. . . . We conclude that, 
if PUHCA were repealed today in the manner proposed in S. 206, 
neither the remaining regulatory scheme nor the current state 
of competition would be sufficient to protect consumers.'' 
(Statement of Charles A. Acquard, NASUCA Executive Director: 
Hearing on ``Public Utility Company Holding Act of 2001,'' 
Senate Banking Subcommittee on Securities and Investment, March 
29, 2001.) These clearly defined position statements make it 
apparent that any successful effort to repeal PUHCA must 
include an attempt to resolve the concerns of PUHCA opponents.
    Past negotiation efforts failed, in part, due to an 
uncompromising position assumed by PUHCA repeal opponents. The 
rural electric cooperatives and public power groups recognized 
that Congress' general lack of interest in repealing PUHCA did 
not require them to come to the table with reasonable demands 
that would satisfy their conditions that adequate market 
protections be created to protect consumers from possible 
holding company abuses. This year, however, these groups 
recognized that Congress' heightened awareness of electric 
energy issues, like PUHCA repeal, has created an atmosphere 
where it is in their best interest to cooperate in developing 
any possible changes to the national electricity market place.
    The threat of California's ongoing problems, coupled with 
concerns over nationwide electric rate increases and possible 
delivery disruptions, set the stage for the PUHCA repeal 
opponents to come to the negotiating table with a much more 
reasonable list of demands. Some of the concerns raised by 
PUHCA repeal opponents include: Providing adequate FERC 
oversight of public utility mergers and acquisitions; giving 
FERC authority to impose structural solutions to address 
competition and unfair practices in national energy markets; 
creation of an inter-agency task force to study competition in 
the wholesale and retail electric energy markets; providing 
equitable civil penalties for public utilities across FERC's 
jurisdiction; and providing Federal oversight of sales and 
transfers of generation assets by public utilities.
    Further discussions with the investor owned utilities 
supporting PUHCA repeal have revealed that PUHCA repeal 
proponents continue to be willing to discuss areas of 
difference with the opponents of this issue and that 
significant progress is possible in addressing these remaining 
issues. Because of jurisdictional issues raised by the 
Committee that amending the Federal Power Act would cause S. 
206 to be referred to the Senate Committee on Energy and 
Natural Resources, the decision was made to address only those 
items that clearly would fall under the Banking Committee's 
jurisdiction. I offered an amendment to S. 206 that would 
create an inter-agency task force, to be made up of 
representatives from the Federal Energy Regulatory Commission, 
the Department of Justice, the Federal Trade Commission, the 
Securities and Exchange Commission, and the United States 
Department of Agriculture's Rural Utility Service, that would 
report back to Congress in one year with a study that would 
review all aspects and participants in the national electric 
energy market. The examination would specifically look at: (1) 
the best means of protecting competition within the wholesale 
and retail electric market; (2) activities within the wholesale 
and retail electric market that may allow unfair and 
unjustified discriminatory and deceptive practices; (3) 
activities within the wholesale and retail electric market, 
including mergers and acquisitions, that deny market access or 
suppress competition; (4) cross subsidization that may occur 
between regulated and nonregulated activities; and (5) the role 
of state public utility commissions in regulating competition 
in the wholesale and retail electric market.
    Included in the study amendment was a second degree 
amendment, cosponsored by the Banking Committee's Ranking 
Member, Senator Paul S. Sarbanes, that would draw attention to 
concerns raised by several members of the Committee regarding 
cross subsidization and the possibility that utility holding 
companies could pass through unfair and unreasonable costs to 
consumers, particularly when those costs have no business being 
included in electricity rates. The amendment put FERC on notice 
that Congress was aware of its oversight responsibilities and 
reaffirmed FERC's authority under the Federal Power Act to 
require that jurisdictional rates are just and reasonable, and 
that the agency has the ability to deny or approve the 
passthrough of costs and to prevent cross subsidization between 
holding company affiliate companies. The agency is expected to 
act in a responsible manner when it considers the expenses 
consumers are forced to pay in their monthly power bills.
    The formation of the inter-agency task force and its 
subsequent study is an important first step in resolving the 
concerns of PUHCA repeal opponents. The remaining issues that 
must still be considered, namely Federal oversight of mergers 
and acquisitions and generation asset sales, and the authority 
of the FERC to require structural remedies in the case of anti-
competitive and unfair conditions in electric markets, must 
still be negotiated and agreed to by both sides of this issue.
    I am convinced that it is possible to reach a final 
agreement regarding PUHCA repeal during this Congress that 
addresses competition and consumer protection. This agreement, 
however, will require PUHCA repeal opponents to continue 
working in good faith, and for PUHCA repeal supporters to 
continue looking at new ways to address the concerns of their 
opponents in a way that adequately protects electricity 
consumers.
                                                         Mike Enzi.

        ADDITIONAL VIEWS OF SENATORS MIKE ENZI AND PAUL SARBANES

    We offered an amendment to S. 206 to address the problem of 
cross-subsidization. The Committee adopted this amendment by 
voice vote. We want to explain briefly the rationale underlying 
this amendment.
    Cross-subsidization was a major concern before PUHCA was 
enacted in 1935. With the prospect of PUHCA repeal, questions 
have been raised about the potential for cross-subsidization 
abuses. SEC Commissioner Isaac Hunt on page 8 of his written 
testimony on March 29, 2001, drew specific attention to the 
``types of abuses [that] can occur through affiliate 
transactions that cross-subsidize unregulated businesses with 
the profits of regulated utilities'' and highlighted the need 
for regulators to ``analyze all transactions within a holding 
company system and prohibit those that pose unreasonable risks 
for utility ratepayers.''
    The utility industry said that it does not want or intend 
cross-subsidization to occur. Mr. David L. Sokol, Chairman and 
CEO of MidAmerican Energy Holdings Company, a utility industry 
witness, stated in oral testimony on March 29, 2001, ``I don't 
think there's any concern or real issue about cross-
subsidization. And by the way, it should be completely 
prohibited. We have no interest in the consumer paying more 
than they should.''
    Our amendment affirms that nothing in S. 206 limits the 
FERC's authority under the Federal Power Act to require that 
jurisdictional rates are just and reasonable, including the 
ability to deny or approve the pass-through of costs, the 
prevention of cross-subsidization and the promulgation of such 
rules and regulations as are necessary or appropriate for the 
protection of utility consumers.
    This authority is designed to prevent cross-subsidization 
abuses in the future, when PUHCA is no longer in force. 
Examples of abuses that have occurred in the past, which the 
Securities and Exchange Commission brought to our attention 
include:
    Holding companies--
           Charging all of their rent and other office 
        expenses to utility subsidiaries;
           Allocating to a utility subsidiary the 
        entire cost of building a new headquarters for the 
        holding company system rather than proportionally 
        allocating costs to all companies in the system;
           Allocating all or most legal costs of the 
        holding company system only to utilities rather than 
        apportioning some costs to itself;
           Allocating all or most advertising costs of 
        the holding company to utility subsidiaries instead of 
        proportionally allocating costs to all companies in the 
        system;
           Allocating all merger and acquisition costs 
        relating to the formation of a new holding company to 
        the utility subsidiaries rather than proportionally 
        allocating costs to all companies in the system;
           Lending money to utility subsidiaries at 
        interest rates higher than the utilities could obtain 
        commercially;
           Demanding dividend payments to the holding 
        companies that are in excess of current earnings of the 
        utilities and that result in the utilities having a 
        higher cost of borrowing and a reduced capacity to meet 
        their operating obligations; and
           Allocating all of their tax liabilities to 
        utility subsidiaries.
    It is our intent that the FERC prevent cross-subsidization 
abuses in the future.

                                   Mike Enzi.
                                   Paul Sarbanes.

                                  
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