[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27565]


[[Page Unknown]]

[Federal Register: November 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 250

[Release Nos. 35-26153; IC-20675; International Series Release No. 740; 
File No. S7-32-94]

 

Request for Comments on Modernization of the Regulation of 
Public-Utility Holding Companies

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Concept release; request for comments.

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SUMMARY: The Commission is soliciting comments on modernization of the 
regulation of public-utility holding companies under the Public Utility 
Holding Company Act of 1935. Developments in recent years require 
reexamination of the need for, and role of, a federal holding company 
statute. Accordingly, the Commission is requesting comment on a number 
of specific issues summarized in this release, and generally on any 
other issues that commenters believe relevant to the regulation of 
public-utility holding companies.

DATES: Comments are to be received on or before February 6, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street 
NW., Washington, DC 20549. All comment letters should refer to File No. 
S7-32-94. All comments received will be available for public inspection 
and copying in the Commission's Public Reference Room, 450 Fifth Street 
NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate Director, 
Joanne C. Rutkowski, Assistant Director, Office of Legal & Policy 
Analysis, Martha Cathey Baker, Assistant Director, Office of 
Applications, Robert P. Wason, Chief Financial Analyst, Office of 
Public Utility Regulation, or C. Hunter Jones, Special Counsel, Office 
of the General Counsel, all at (202) 942-0545.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Commission is soliciting comments in connection with a 
comprehensive study (``Study'') of regulation under the Public Utility 
Holding Company Act of 1935 (``Holding Company Act'' or ``Act''). The 
Holding Company Act was complex and far-reaching New Deal legislation, 
enacted by Congress to eliminate abuses that had plagued the U.S. 
electric and gas utility industry and threatened the interests of 
investors and consumers. The public-utility holding companies subject 
to this statute operate across the United States, serving a vast number 
of utility consumers.1 Although in the past sixty years there have 
been fundamental changes in the industry, as well as significant legal 
and regulatory developments, the Holding Company Act has remained 
largely unchanged.
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    \1\At present, there are fourteen active registered holding 
companies and several hundred exempt holding companies.
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    The Commission is undertaking a thorough evaluation of the Act, to 
review the regulatory framework in light of developments in recent 
years and to consider how federal regulation of utility holding 
companies can best serve the interests of investors, consumers, and the 
general public in the years to come. The Commission inaugurated the 
Study with a roundtable discussion, in Washington, D.C. on July 18 and 
19, 1994 (``Roundtable''), in which representatives of the utility 
industry, consumer groups, trade associations, investment banks, rating 
agencies, economists, state, local and federal regulators, and others 
participated.2
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    \2\A transcript of the Roundtable discussion, which was open to 
the public, will soon be available for inspection and copying at the 
Commission's Public Reference Room in File No. S7-19-94.
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    The participants discussed a number of issues facing the industry 
today. They noted that deregulation and increased competition have 
created risks, as well as potential benefits, for public utilities. 
Many participants stated that utilities are experiencing little or no 
earnings growth in their core utility business. A number of possible 
responses, including reorganization of the industry along functional 
lines, diversification, and investment in foreign projects, were 
mentioned. Although the participants had widely divergent views on the 
future of the Act, all agreed that the statute poses some impediments 
to change. Recommendations ranged from selective reform of the Act to 
outright repeal.
    Those favoring repeal have argued that the Act is redundant or 
outmoded as a result of changes in the industry, the capital markets, 
accounting standards, state and other federal regulation, and the 
disclosure required under other federal securities laws. Although the 
Commission has previously supported proposals to repeal or transfer 
administration of the Act,3 these proposals have not succeeded. 
Commenters who favor continued efforts for repeal should describe in 
particular the protections that would be afforded consumers by state 
and other federal law, in the absence of a Holding Company Act.
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    \3\See, e.g., Statement of the U.S. Securities and Exchange 
Commission Concerning Proposals to Amend or Repeal the Public 
Utility Holding Company Act of 1935 (June 2, 1982).
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    At the Roundtable, Commissioner Richard Y. Roberts expressed the 
view, and the Commission concurs, that the most valuable contributions 
to the Study may consist of concrete proposals for reforms on which it 
is likely that the industry, the regulators and other interested 
parties can agree.4 The objective of such proposals would be to 
modernize and simplify regulation, reduce the delay inherent in the 
current administration of the Act, and minimize regulatory overlap, 
while protecting the interests of consumers and investors.
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    \4\Several commenters provided specific proposals for Commission 
consideration. See, e.g., Comments by Joan T. Bok, Chairman, New 
England Electric System; Summary of Comments of Clinton Vince, 
Special Counsel to the Council of the City of New Orleans; Columbia 
Gas System, Initial Comments on the Need for Legislative Reform 
(Aug. 10, 1994) (available in Public Comment File No. S7-19-94).
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    As a point of departure, the existing regulatory framework is 
summarized below. Also identified are a number of specific topics on 
which the Commission is seeking comment. Commenters are encouraged to 
address the overall regulatory structure for public-utility holding 
companies, and to consider the appropriate role of a federal holding 
company statute, particularly in view of the work of the Federal Energy 
Regulatory Commission (``FERC'') and state and local regulators. In 
addition, commenters are urged to address any general topics or issues 
that they believe merit examination in the Commission's study of 
holding company regulation.
    The Commission requests that commenters provide specific statutory 
or rulemaking language, where possible, to implement their 
recommendations. It may also be helpful to compare the costs and 
benefits of various proposals, to companies as well as to consumers and 
investors. In addition, if commenters argue that regulatory or market 
protections outside the Holding Company Act suffice to protect 
investors and consumers on a particular issue, they should describe the 
operation of these other safeguards.

II. The Existing Regulatory Structure

A. Background: Passage of the Holding Company Act

    The Holding Company Act5 was intended to address the practices 
by which small groups of investors, by means of the holding company 
structure, were able to exploit vast networks of utility companies, to 
the detriment of utility consumers and other security holders. The 
specific problems identified by Congress included inadequate 
disclosure, excessive leverage, abusive affiliate transactions, use of 
the holding company to evade state regulation, and the growth and 
extension of holding companies without regard to the economy of 
management and operation of system utility companies.6 These 
aggressive practices harmed investors who owned the securities of the 
utility companies and captive utility consumers who were forced to pay 
inflated rates for gas and electric energy.
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    \5\Pub. L. No. 74-333, 49 Stat. 803 (1935) (codified as amended 
at 15 U.S.C. 79a-79z-6). The Holding Company Act was enacted as 
Title I of the Public Utility Act of 1935. Title II amended the 
Federal Water Power Act of 1920 to create the Federal Power Act. See 
Pub. L. No. 74-333, 49 Stat. 838 (1935) (codified as amended at 16 
U.S.C. 791a-828c).
    \6\Holding Company Act section 1(b) (15 U.S.C. 79a(b)).
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    The multistate character of the holding companies prevented 
effective control by state regulators. Holding company ownership 
shifted management and control from the operating utilities, which were 
subject to state regulation, to a parent company organized under the 
laws of another state and beyond the jurisdiction of utility regulators 
in any state. During the early years of this century, the federal 
government played a very limited role in the regulation of the utility 
industry.7 At the time the Holding Company Act was passed, 
jurisdiction over holding companies consisted largely of nascent, 
indirect regulation under the Securities Act of 19338 and the 
Securities Exchange Act of 1934.9
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    \7\The jurisdiction of the Federal Power Commission was then 
narrowly defined. Prior to 1935, most transactions involving 
interstate transmission of electricity were not regulated by the 
federal government. See Richard Lowitt, Federal Power Commission, in 
Government Agencies 233, 235 (Donald R. Whitnah ed., 1983). See 
infra section II.C.1. (discussing developments in federal energy 
regulation).
    \8\Pub. L. No. 73-22, 48 Stat. 74 (1933) (codified as amended at 
15 U.S.C. 77a et seq.).
    \9\Pub. L. No. 73-290, 48 Stat. 881 (1934) (codified as amended 
at 15 U.S.C. 78a et seq.).
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    Extensive studies that preceded the Act found ``a number of almost 
inherent incidental abuses in the holding-company system which cannot 
be reached by direct regulation of the operating company,''10 and 
concluded that ``[t]he only practical control over public-utility 
holding companies will be one which can directly reach the holding 
company itself and supervise its security structure and its use of 
capital * * *. Only in that way can Government protect the investors 
who supply that capital and the consumers who must bear its 
cost.''11
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    \1\0Summary Report of the Federal Trade Commission to the 
Senate, Utility Corporations, S. Doc. No. 92, 70th Cong., 1st Sess., 
pt. 73-A, at 3 (1935) (in 101 volumes) (``For example, no matter how 
strict the regulation of an operating company, improper payments of 
dividends and of other items still can be made by the holding 
company out of surplus other than earned surplus. Excessive capital 
issues can be floated by the holding company, with an important 
indirect effect upon rates charged by the operating company to the 
public.'').
    \1\1Report of National Power Policy Committee on Public-Utility 
Holding Companies, S. Doc. No. 137, 74th Cong., 1st Sess. 8 (1935). 
See also SCEcorp, Holding Co. Act Release No. 25564 (June 29, 1992), 
citing Arkansas Louisiana Gas Co., 36 S.E.C. 121, 137 (1954) (the 
Act was intended to address ``evils * * * which because of holding 
company action or control, cannot be effectively dealt with by other 
regulatory agencies'').
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    The Holding Company Act was intended to curb the abusive practices 
of public-utility holding companies by bringing these companies under 
effective control.12 Thus, the Commission, as the agency with 
expertise in financial transactions and corporate finance, was charged 
with regulation of the corporate structure and financings of public-
utility holding companies and their affiliates.13
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    \1\2Gulf States Utilities Co. v. FPC, 411 U.S. 747, 758 (1973).
    \1\3At the same time, Congress amended the Federal Power Act to 
provide effective federal regulation of the expanding business of 
transmitting and selling electric power in interstate commerce. 
Congress entrusted the administration of this statute to the Federal 
Power Commission (now the Federal Energy Regulatory Commission), as 
the agency with the technical expertise necessary to regulate the 
transmission of energy. See Arcadia v. Ohio Power Co., 498 U.S. 73, 
87 (1990) (Stevens, J., concurring). The role of the FERC is 
discussed infra at section II.C.1.
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    Any company that owns 10 percent or more of the outstanding voting 
securities of a public-utility company is presumptively a holding 
company for purposes of the Act.14 The burden of regulation under 
the Act falls most heavily on holding companies that have significant 
interstate utility operations, and are thereby not readily susceptible 
to effective state regulation. These companies must register and comply 
with the myriad requirements of the Act.15
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    \1\4Holding Company Act section 2(a)(7)(A) (15 U.S.C. 
79b(a)(7)(A)). For purposes of the Act, a public-utility company 
means either an electric or a gas utility company. Holding Company 
Act section 2(a)(5) (15 U.S.C. 79b(a)(5)). An electric utility 
company is broadly defined as any company that owns or controls 
assets used for the generation, transmission or distribution of 
electricity. Holding Company Act section 2(a)(3) (15 U.S.C. 
79b(a)(3)). A gas utility company is more narrowly defined as any 
company that owns or controls assets used for the retail 
distribution of gas for heat, light or power. Holding Company Act 
section 2(a)(4) (15 U.S.C. 79b(a)(4)).
    \1\5Holding Company Act section 5 (15 U.S.C. 79e).
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    Section 11, which the Supreme Court has described as the ``very 
heart'' of the Act,16 generally limits registered holding 
companies to a single integrated public-utility system and such other 
businesses as are ``reasonably incidental, or economically necessary or 
appropriate'' to the operations of that system.17 Companies in a 
registered holding company system must obtain Commission approval for a 
wide range of transactions, including financings,18 
acquisitions,19 and intrasystem transactions.20 These 
companies are also subject to various accounting and reporting 
requirements.21
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    \1\6SEC v. New England Elec. System, 384 U.S. 176, 180 (1966), 
citing North American Co. v. SEC, 327 U.S. 686, 704 n.14 (1946).
    \1\7Holding Company Act section 11(b)(1) (15 U.S.C. 
Sec. 79k(b)(1)).
    \1\8Holding Company Act sections 6, 7 and 12 (15 U.S.C. 
Secs. 79f, g and l).
    \1\9Holding Company Act sections 9 and 10 (15 U.S.C. Secs. 79i 
and j).
    \2\0Holding Company Act section 13 (15 U.S.C. Sec. 79m).
    \2\1See Holding Company Act sections 14 and 15 (15 U.S.C. 
Sec. 79n and o) and rules thereunder.
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    Although most public-utility holding companies are largely exempt 
from pervasive regulation under the Holding Company Act, they 
nonetheless remain subject to the requirement of prior Commission 
approval for utility acquisitions. In addition, the Commission may 
challenge the continued availability of an exemption under the ``unless 
and except'' clause of section 3.22
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    \2\2Section 3(a) of the Act (15 U.S.C. Sec. 79c(a)) authorizes 
the Commission in certain circumstances to exempt any holding 
company and subsidiary company thereof from any provision of the 
Act, ``unless and except insofar as it finds the exemption 
detrimental to the public interest or the interest of investors or 
consumers.''
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B. Legislative and Regulatory Developments Related to the Holding 
Company Act

    The Commission's early administration of the Act was largely 
directed toward the reorganization of existing holding companies. By 
the 1950s, this work was largely completed.23 Since then, the 
Commission has acted to ensure that the abuses that gave rise to the 
Act do not recur.24
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    \2\3See Statement of the U.S. Securities and Exchange Commission 
Concerning Proposals to Amend or Repeal the Public Utility Holding 
Company Act of 1935 (June 2, 1982).
    \2\4Section 1(c) of the Holding Company Act (15 U.S.C. 79a(c)) 
directs the Commission to administer all the provisions of the Act 
to prevent practices the Congress found detrimental to the interests 
of investors, consumers and the general public (the ``protected 
interests'' under the Act).
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    Although the basic framework of the Act remains unchanged, Congress 
has created a number of statutory exceptions to the regulatory scheme. 
Beginning in the 1970s, Congress enacted the Public Utility Regulatory 
Policies Act of 1978 (PURPA)25 to stimulate alternative energy 
production. To that end, PURPA granted ``qualifying facilities'' (QFs) 
significant regulatory advantages over traditional generating 
facilities. Among other things, most QFs are exempted from the Holding 
Company Act,26 and a registered holding company can acquire 
interests in QFs that are unrelated to its core utility 
operations.27 In addition, Congress enacted the Gas Related 
Activities Act of 1990 (GRAA), which permits gas registered holding 
companies to acquire significant production and transportation assets 
that do not directly serve the needs of their retail distribution 
systems.28
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    \2\5Pub. L. No. 95-617, 92 Stat. 3117 (1978).
    \2\6Most qualifying facilities are deemed to be nonutilities for 
purposes of the Holding Company Act. See 18 CFR Sec. 292.602.
    \2\7See Pub. L. No. 99-186, 99 Stat. 1180 (1985) (investments in 
cogeneration by registered gas systems); Pub. L. No. 99-553, 100 
Stat. 3087 (1986) (investments by registered electric systems); Pub. 
L. No. 102-486, Sec. 713, 106 Stat. 2776, 2911 (1992) (section 713 
of Energy Policy Act of 1992, investments by registered holding 
companies in small power production).
    \2\8Pub. L. 101-572, 104 Stat. 2810 (1990). Gas production and 
transportation activities are nonutility businesses for purposes of 
the Holding Company Act. See Holding Company Act section 2(a)(4) (15 
U.S.C. Sec. 79b(a)(4)) (``gas utility company'' includes only 
companies owning or controlling assets used for retail gas 
distribution).
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    Congress accelerated the pace of change in the industry with the 
Energy Policy Act of 1992,29 which enables companies to invest 
in ``exempt wholesale generator''30 and ``foreign utility 
company''31 operations throughout the United States and abroad. 
The Energy Policy Act represented the first major change in the 
pattern of regulation under the Holding Company Act. Congress did 
not dispense with the need for Commission approval of activities 
under PURPA and GRAA: Holding Company Act section 10(b)(3) continues 
to require that an acquisition not be detrimental to the public 
interest or the interests of investors or consumers. In contrast, 
the Energy Policy Act broadly exempts certain wholesale generators 
from all provisions of the Holding Company Act and expressly 
authorizes a registered holding company to acquire an exempt 
wholesale generator without the need for Commission approval. 
Congress sought to promote this type of diversification and made the 
Commission primarily responsible for protecting consumers of 
registered holding companies from any adverse effects of these new 
ventures. The Commission's authority in this area, however, is 
limited; the Commission can regulate investments in exempt wholesale 
generators only indirectly, through its jurisdiction over holding 
company financings and other related transactions. This hybrid 
regulation has proved troublesome, and the Commission has strongly 
recommended that Congress not duplicate the model developed under 
the Energy Policy Act.32
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    \2\9Pub. L. No. 102-486, 106 Stat. 2776 (1992).
    \3\0An exempt wholesale generator is any person determined by 
the FERC to be engaged exclusively in owning or operating facilities 
used for the generation of electricity for sale at wholesale. See 
Holding Company Act section 32(a)(1) (15 U.S.C. Sec. 79z-5a(a)(1)); 
see also Holding Company Act section 32(b) (15 U.S.C. Sec. 79z-
5a(b)) (permitting certain foreign retail sales).
    \3\1Briefly stated, any company can claim status as a foreign 
utility company by notifying the Commission that it owns or operates 
gas or electric utility facilities outside the United States. See 
Holding Company Act section 33(a)(3) (15 U.S.C. Secs. 79z-5b(a)(3)) 
(such company cannot derive any utility income from within the 
United States, and cannot be, or have a subsidiary that is, a 
public-utility operating in the United States).
    \3\2Hearings on Proposals to Lift the Current Diversification 
Restrictions on Telecommunications Activities of Registered Holding 
Companies Before the Subcomm. on Telecommunications and Finance and 
the Subcomm. on Energy and Power of the House Comm. on Energy and 
Commerce, 103d Cong., 2d Sess. (1994) (statement of Richard Y. 
Roberts, Commissioner, SEC).
    Although the Commission has adopted rules 53 and 54 (17 CFR 
250.53 and 54) that are intended to protect consumers and investors 
from any substantial adverse effect that may be associated with 
investments in exempt wholesale generators, these rules are 
currently the subject of litigation in the U.S. Court of Appeals for 
the District of Columbia Circuit. NARUC v. SEC, No. 93-1778 (D.C. 
Cir. filed Nov. 22, 1993). The Court of Appeals has been asked to 
consider the extent to which the Commission must ensure the 
protection of consumers of registered holding companies from any 
detriment associated with investments in exempt wholesale 
generators.
    The Commission is currently engaged in a related rulemaking with 
respect to investments in foreign utility companies. See Holding Co. 
Act Release No. 25757 (Mar. 8, 1993), 58 FR 13719 (Mar. 15, 1993) 
(notice of proposed rulemaking).
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C. Other Regulatory Factors

1. FERC Regulation
    The work of the Commission under the Holding Company Act was 
intended to complement the work of the Federal Power Commission (now 
the FERC) in the regulation of the electric and gas utility industry.
    a. Electricity. The Holding Company Act was enacted as Title I of 
the Public Utility Act of 1935.33 Title II of the 
legislation34 gave the Federal Power Commission (FPC) broad 
authority over the transmission and sale of electricity in interstate 
commerce.
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    \3\3Pub. L. No. 74-333, 49 Stat. 803 (1935).
    \3\4Pub. L. No. 74-333, 49 Stat. 838 (1935) (codified as amended 
at 16 U.S.C. Secs. 791a-828c).
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    Congress's decision to entrust administration of the Holding 
Company Act to the SEC and administration of the Federal Power Act to 
the FPC reflected two differing goals. The Holding Company Act was 
intended to curb abusive practices of public-utility subsidiaries of 
holding companies by bringing them under effective control. The Federal 
Power Act was intended to provide effective federal regulation of the 
transmission and sale of electricity in interstate commerce.35
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    \3\5See Gulf States Utilities Co. v. FPC, 411 U.S. 747, 758 
(1973). The Federal Power Act represented a response to the gap in 
state regulation of utility rates and services that arose in the 
wake of the decision of the United States Supreme Court in Public 
Utilities Comm'n of Rhode Island v. Attleboro Steam & Elec. Co., 273 
U.S. 83, 86-90 (1927), overruled in part, Arkansas Elec. Coop. v. 
Ark. Public Service Comm'n, 461 U.S. 375, 390-96 (1983). The Court 
in Attleboro held that interstate wholesale sales of electricity 
were beyond the reach of state regulation. See New England Power Co. 
v. New Hampshire, 455 U.S. 331, 340 (1982). See generally Note, 
Federal Regulation of Holding Companies: The Public Utility Act of 
1935, 45 Yale L.J. 468 (1936).
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    The primary focus in the administration of the Federal Power Act 
has been the protection of ratepayers against excessive electric 
rates.36 Utilities must file wholesale rate schedules with the 
FERC, which may then suspend any rate increase for up to five months, 
order refunds for rates that it finds exceed a ``just and reasonable'' 
level, and prescribe rates to be charged prospectively.
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    \3\6The Federal Power Act also gives the FERC jurisdiction over 
accounting practices and over facilities used for the transmission 
of electricity in interstate commerce. Section 204 authorizes the 
FERC to regulate the issuance of securities or assumption of 
obligations or liabilities by public utilities, but only if such 
issuance or assumption is not regulated by a state utilities 
commission. 16 U.S.C. Sec. 824c. The FERC has interpreted this 
authority narrowly. See Michael Small, A Guide to FERC Regulation 
and Ratemaking of Electric Utilities and Other Power Suppliers, 18 
(3d ed. 1994).
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    Under the Public Utility Regulatory Policies Act, the FERC adopted 
rules concerning qualifying facilities. These rules require electric 
utilities to interconnect with QFs and to offer to purchase power from, 
and sell power to, QFs, and set the general standard for determining 
the rates for power sale transactions with QFs.37
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    \3\7Congress in PURPA also gave the FERC direct authority to 
order wholesale transmission services by public utilities and by 
certain other entities. There were significant procedural and 
substantive limitations on this authority, however, and FERC issued 
only one order pursuant to this authority. See Central Power and 
Light Co., 17 FERC  61,078 (1981), order on reh'g, 18 FERC  61,100 
(1982), further order, Texas Utilities Elec. Co., 40 FERC  61,077 
(1987).
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    Following the enactment of PURPA, other independent generators 
began to seek entry into bulk power markets. The FERC, which had 
traditionally required cost-based rates for electric power, began to 
permit market-based rates for nontraditional sellers that could not 
exercise market power, where there was no evidence of affiliate abuse 
or reciprocal dealing.38 As traditional, investor-owned utilities 
began to seek market-based rates for their existing excess capacity, 
the FERC extended its market power analysis to these companies. In 
these matters, the FERC required that the utility mitigate its 
transmission market power by opening its transmission system to other 
wholesale sellers and buyers.39 The FERC has also relied on open 
access transmission tariffs to mitigate the anticompetitive effects of 
proposed mergers.40
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    \3\8See, e.g., Commonwealth Atlantic Ltd. Partnership, 51 FERC 
61,368 (1990).
    \3\9See, e.g., Public Service Co. of Indiana, 51 FERC 61,367 
(1990).
    \4\0Open access transmission tariffs have been a central feature 
of recent combinations involving FERC-regulated utilities. Major 
combinations involving FERC-regulated utilities have included the 
mergers of Utah Power & Light Company and PacifiCorp; Northeast 
Utilities and Public Service of New Hampshire; Kansas Power & Light 
Company and Kansas Gas & Electric Company; Entergy Corporation and 
Gulf States Utilities Company; Cincinnati Gas & Electric Company and 
PSI Energy, Inc.; and the proposed merger of Central and South West 
Corporation and El Paso Electric Company. With the exception of the 
Utah Power & Light merger, each of these mergers also is subject to 
the requirement of approval by the SEC.
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    In the Energy Policy Act of 1992, Congress gave the FERC additional 
authority to promote competition in wholesale bulk power markets by 
ordering transmission,41 if it finds that to do so is in the 
public interest and will not unreasonably impair the continued 
reliability of affected electric systems.42 The FERC is also 
responsible for determining exempt wholesale generator status under the 
Energy Policy Act.43
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    \4\1``Any electric utility, Federal power marketing agency, or 
any other person generating electric energy for sale for resale'' 
may apply to the FERC for an order requiring a utility to provide 
``transmission services (including any enlargement of transmission 
capacity necessary to provide such services).'' Federal Power Act 
section 211(a) (16 U.S.C. Sec. 824j(a)).
    \4\2As of September 22, 1994, the FERC had granted six 
applications for mandatory services (three proposed orders and three 
final orders). See, e.g., City of Bedford, Virginia, 68 FERC 61,003 
(1994).
    Since enactment of the Energy Policy Act, the FERC has 
undertaken a number of initiatives with respect to the development 
of competitive bulk power markets. These measures include a policy 
statement on regional transmission groups, a rulemaking on 
transmission information availability, and an inquiry on 
transmission pricing policy. In a series of cases, the FERC has also 
interpreted the Federal Power Act's prohibition on undue 
discrimination to require that transmission owners offer services to 
others comparable to those they provide to themselves.
    \4\3An exempt wholesale generator is exempt from all provisions 
of the Holding Company Act. See Holding Company Act section 32(e) 
(15 U.S.C. Sec. 79z-5a(e)).
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    b. Natural gas. FERC regulation of the natural gas industry has 
changed significantly since 1938, when the Natural Gas Act gave the FPC 
authority to set ``just and reasonable'' rates for pipelines selling 
natural gas for resale in interstate commerce.44 Under the Natural 
Gas Act, the FPC had jurisdiction over both the price and the 
allocation of natural gas sold at the wellhead for resale in interstate 
commerce. During the late 1960s and the early 1970s, the FPC kept the 
wellhead price for interstate natural gas artificially low, thereby 
encouraging consumption. At the same time, the federal price restraints 
discouraged producers from dedicating reserves to the pipelines that 
served the interstate market. The result was a series of gas shortages 
in the mid-1970s.
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    \4\4Pub. L. No. 75-688, 52 Stat. 821 (1938) (codified as amended 
at 15 U.S.C. Secs. 717-717w). In 1954, the U.S. Supreme Court ruled 
that sales by independent producers were also subject to regulation 
under the Natural Gas Act. Phillips Petroleum Co. v. Wisconsin, 347 
U.S. 672 (1954).
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    In reaction to these shortages, Congress enacted the Natural Gas 
Policy Act of 1978, which provided for partial decontrol of natural gas 
at the wellhead.45 Over the next decade, Congress and the FERC 
worked to encourage competition in the natural gas industry. Pursuant 
to the Natural Gas Wellhead Decontrol Act of 1989, the FERC implemented 
full producer deregulation, effective January 1, 1993.46
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    \4\5Pub. L. No. 95-621, 92 Stat. 3351 (1978) (repealed in 1987).
    \4\6Pub. L. No. 101-60, 103 Stat. 157 (1989) (codified as 
amended at 15 U.S.C. Sec. 3331).
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    The latest of the FERC's major natural gas rulemakings, Order No. 
636, significantly changed the structure of the services provided by 
interstate pipelines.47 Among other things, the order requires 
that pipelines provide open access transportation service that is equal 
in quality for all gas supplies, regardless of whether the customer 
purchases gas from the pipeline or from another supplier.
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    \4\7Regulation of Natural Gas Pipelines After Partial Wellhead 
Decontrol, Order No. 636, 57 FR 13267 (Apr. 16, 1992).
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2. State and Local Regulation
    Regulation of electric and gas utilities varies among state and 
local governments. Most state commissions have authority to issue 
licenses, franchises or permits for the initiation of service, for 
construction or abandonment of facilities and related matters. With 
respect to retail rates, state commissions generally have the power to 
require prior authorization of rate changes, to suspend proposed rate 
changes, to prescribe interim rates and to initiate rate 
investigations. Most state commissions also have authority to control 
the quantity and quality of service, to require uniform systems of 
accounting, and to regulate the issuance of securities.48
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    \4\8See Charles F. Phillips, Jr., The Regulation of Public 
Utilities: Theory and Practice 136 (1993).
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    Congress intended that the Commission's work be coordinated with, 
and complement, the work of state and local regulators.49 In 
recent years, the Commission has worked in consultation with these 
regulators on a number of matters.
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    \4\9Numerous sections of the Act refer to regulation at the 
state and local level. See, e.g., Holding Company Act sections 
2(a)(26), 6(b), 8, 9(b), 10(f), 18, 19 and 20(b) (15 U.S.C. 
Secs. 79b(a)(26), f(b), h, i(b), j(f), r, s and t(b)).
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3. Other Considerations
    Registered holding companies are subject to extensive reporting 
requirements under the Act. In addition, the securities of these 
companies are publicly held and are registered under the Securities Act 
of 1933 (``Securities Act''), and the companies must comply with the 
continuous disclosure requirements of the Securities Exchange Act of 
1934 (``Exchange Act''). When Congress passed the Holding Company Act, 
these laws were still in their infancy. Congress has amended the 
Securities Act and the Exchange Act several times since 1935, in order 
to expand and strengthen the disclosure and reporting requirements, as 
well as the Commission's ability to enforce these provisions.50 
Thus, it appears that investors today have far greater access to 
information concerning their investment decisions.
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    \5\0See, e.g., Securities Acts Amendments of 1964, Pub. L. No. 
88-467, 78 Stat. 565 (1964) (extending Securities Exchange Act 
registration requirements to over-the-counter securities); Williams 
Act, Pub. L. No. 90-439, 82 Stat. 454 (1968) (additional disclosure 
requirements in situations of control acquisitions); Securities 
Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 
101-429, 104 Stat. 931 (1990) (increasing Commission's authority to 
seek and impose remedies against securities law violations).
    The courts have also permitted private litigants to bring 
actions for violations of certain provisions of the securities laws. 
See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 
reh'g denied, 423 U.S. 884 (1975) (implied private right of action 
for securities fraud).
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    The Commission requests comment on these and other factors, 
including the development of generally accepted accounting principles 
and the role of nationally recognized statistical rating organizations 
(NRSROs)51 in protecting consumers and investors against holding 
company abuses.
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    \5\1See Securities Act Release No. 7085 (Aug. 31, 1994), 59 FR 
46314 (Sept. 7, 1994) (concept release concerning the definition and 
status of NRSROs).
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III. Conceptual Issues

    The electric and gas utility industry is in transition. The rapid 
growth that characterized the industry in the early part of this 
century has diminished. In addition, companies must adapt to an 
increasingly competitive environment. The present model of regulation 
under the Act, which strictly limits the size of a system's utility 
operations and the scope of its nonutility businesses, was intended to 
focus the attention of the registered holding company on the needs of 
its operating utilities, and thereby protect consumers and investors 
from the risks that might be associated with unrelated businesses. Some 
have suggested that this model is no longer appropriate and that market 
conditions require a broader focus on energy services and other 
nonutility activities. The Act, as currently administered, does not 
afford the degree of flexibility that many believe will be necessary to 
meet these changes.
    One purpose of the study is to explore a new approach to regulation 
in this area. The Act was intended to protect the public interest and 
the interests of investors and consumers. The phrase ``public 
interest'' has been used in connection with the policy of curing evils 
that result ``when the growth and extension of holding companies bears 
no relation to economy of management and operation or the integration 
and coordination of related operating properties.''52
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    \5\2Holding Company Act section 1(b)(4) (15 U.S.C. 79a(b)(4)), 
cited in North American Co., 11 S.E.C. 194, 218-219 (1942), aff'd, 
133 F.2d 148 (2d Cir. 1943), aff'd, 327 U.S. 686 (1946).
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    The need for adequate disclosure for investors has largely been 
addressed by developments in the federal securities laws and in the 
securities markets themselves.53 With respect to consumer 
interests, it appears that retail distribution will continue to be a 
monopoly for at least the next decade, thus justifying the continued 
protection of captive consumers.
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    \5\3See section 1(b)(1) of the Holding Company Act (15 U.S.C. 
Sec. 79a(b)(1)) (investor interests may be adversely affected ``when 
such investors cannot obtain the information necessary to appraise 
the financial position or earning power of the issuers'').
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    The Commission has noted that there is an inherent tension between 
the drive toward competitive markets, and the need to protect captive 
utility customers.54 The magnitude of the anticipated change in 
the utility industry raises concerns whether any regulator can 
effectively protect ratepayers.55 While some believe that market 
forces will ultimately result in lower prices for consumers, others 
suggest that there will be losers as well as winners along the 
way.56 At a minimum, any new approach must carefully balance the 
competing interests, and provide safeguards against detriment to 
consumers.
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    \5\4Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58 FR 
51488 (Oct. 1, 1993).
    \5\5At present, registered holding companies can readily invest 
up to 50 percent of their consolidated retained earnings, or 
approximately $7 billion, in exempt wholesale generators and foreign 
utility companies. See rule 53(a) under the Holding Company Act (17 
CFR 250.53(a)).
    \5\6The introduction of competition in the natural gas industry, 
for example, was not without its costs. Many producers went out of 
business when wellhead prices collapsed. See Donald F. Santa, Jr. 
and Patricia J. Beneke, Federal Natural Gas Policy and the Energy 
Policy Act of 1992, 14 Energy L.J. 1, 8 (1993). The Columbia Gas 
System, a registered gas utility holding company, has filed for 
relief under Chapter 11 of the Bankruptcy Code (11 U.S.C. 1101 et 
seq.) in large part as a result of uneconomic take-or-pay contracts.
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    Reform of existing regulation also calls into question the roles of 
the respective regulators. The Commission requests comments on these 
topics, especially on the need to adjust responsibilities among the 
regulators. It would be helpful, in this regard, for commenters to 
provide specific information concerning the various regulatory 
approvals that may be required for a transaction under present law.
    The studies that preceded the Act found ``wide differences in the 
extent and effectiveness of the regulatory policies of the various 
States.''57 Although there has been a significant increase in the 
reach of state utility regulation, the Commission has noted that the 
pattern of state control over operating utilities and their 
relationships with affiliates remains uneven.58 There are concerns 
that the states remain unable to regulate interstate holding companies 
directly in a comprehensive fashion.59
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    \5\7Summary Report of the Federal Trade Commission to the 
Senate, Utility Corporations, S. Doc. No. 92, 70th Cong., 1st Sess., 
pt. 73-A, at 2 (1935).
    \5\8See, e.g., Statement of the U.S. Securities and Exchange 
Commission Concerning Proposals to Amend or Repeal the Public 
Utility Holding Company Act of 1935 (June 2, 1982).
    \5\9See The National Energy Security Act of 1991: Hearings on S. 
341 Before the Senate Comm. on Energy and Natural Resources, 102d 
Cong., 1st Sess. (1991) (statement of Edward H. Fleischman, 
Commissioner, SEC).
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    The Commission seeks comment on the current status of the 
regulation of electric and gas utilities by the states. In particular, 
descriptions of the regulatory systems of each state would be helpful 
in determining the extent to which state regulators would be able to 
provide regulatory protection in the absence of a federal holding 
company statute. Comment is requested on the problems inherent in the 
regulation of a multistate system, including the possibility of 
conflict among the various state and local regulators.
    Comment is also sought on the role of the FERC in regulating 
utility holding companies. Would the FERC's existing authority, 
combined with that of the states, suffice to protect consumers? In the 
absence of the Holding Company Act, it appears that there would be 
little direct regulation of the nonutilities that may ultimately 
comprise a significant part of a registered system's business 
activities. If there is a continuing need for a federal holding company 
statute, should the FERC rather than the SEC administer it?

IV. Specific Topics to Be Addressed

    To facilitate the identification of issues, paragraphs in which 
comments are specifically requested in this section are numbered 
consecutively. Commenters are encouraged to refer to these numbers in 
their comments, but are also welcome to comment on any issues not 
contained in numbered paragraphs.

A. Financings and Intrasystem Transactions

    Under the Holding Company Act, the Commission has broad authority 
over financings and intrasystem transactions involving companies in a 
registered holding company system. As discussed above, FERC and state 
regulatory approval is also required for certain transactions. In 
addition, the FERC and state regulators, in the exercise of ratemaking 
authority, may determine whether the costs associated with such 
transactions will be passed on to utility consumers.
1. Financings
    Prior Commission approval is generally required for the issuance 
and sale of securities by a company in a registered system.60 The 
Commission can refuse to authorize the issuance of a security that is 
not reasonably adapted to the capital structure of the issuer and other 
companies in the holding company system, or to the earning power of the 
issuer, or that ``is not necessary or appropriate to the economical and 
efficient operation of a business in which the applicant lawfully is 
engaged or has an interest.''61 The Act also requires Commission 
approval for various intrasystem financing transactions, including, 
among other things, loans from the parent to a subsidiary company, and 
guarantees by the parent of the obligations of a subsidiary 
company.62
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    \6\0See Holding Company Act section 6(a) (15 U.S.C. 
Sec. 79f(a)). The Act permits the Commission to grant exemptions in 
certain situations, such as the issuance and sale of securities by a 
subsidiary if the transaction is expressly authorized by a state 
regulatory commission. See section 6(b) (15 U.S.C. Sec. 79f(b)).
    \6\1Holding Company Act section 7 (15 U.S.C. Sec. 79g). This 
standard has been modified for financings by registered holding 
companies for the purpose of acquiring interests in exempt wholesale 
generators. Holding Company Act section 32(h)(3) (15 U.S.C. 
Sec. 79z-5a(h)(3)) provides that

    the Commission shall not make a finding that such security is 
not reasonably adapted to the earning power of such company or to 
the security structure of such company and other companies in the 
same holding company system, or that the circumstances are such as 
to constitute the making of such guarantee an improper risk for such 
company, unless the Commission first finds that the issue or sale of 
such security, or the making of the guarantee, would have a 
substantial adverse impact on the financial integrity of the 
registered holding company system[.]

    See also rule 53 (17 CFR 250.53).
    \6\2See Holding Company Act section 12 (15 U.S.C. Sec. 79l) and 
rules thereunder.
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    1. Comment is sought on the Commission's review of financing 
transactions. As a general matter, are the protections provided by such 
review still necessary in view of developments in state and federal 
regulation? If this review is still needed, how could it be made more 
effective and efficient?
    2. At the Roundtable, many participants emphasized the need to 
streamline Commission review and liberalize the standards for 
financings. Regulatory delay was described as an impediment to the 
companies' ability to access the capital markets. How critical a role 
does timing play in financial decisions? To what extent is regulatory 
delay an obstacle to desirable financing opportunities?
    3. The Commission has adopted an approach, similar to the shelf-
registration provisions of rule 415 under the 1933 Act,63 under 
which a registered company may obtain authorization for all short-term 
debt financings contemplated for a two-year period.64 Could this 
approach be expanded or altered to meet the companies' need for greater 
flexibility and speed of approval? Could a safe harbor for routine 
financings be properly tailored to balance a company's need for 
flexibility and speed with the need to protect ratepayers? What should 
be the parameters of a safe harbor (e.g., minimum capitalization, 
dividend payout ratios, third-party credit ratings)? How should such 
routine financings be defined for the purpose of a safe harbor rule?
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    \6\317 CFR 230.415.
    \6\4See, e.g., Northeast Utilities, Holding Co. Act Release No. 
25710 (Dec. 16, 1992), 53 SEC Dkt. 0190 (Jan. 5, 1993).
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    4. At the Roundtable, some suggested that utilities would like to 
issue a greater variety of securities in order to reduce capital costs. 
Under current administration of the Act, registered companies are 
generally limited to conventional securities, such as common stock, 
preferred stock, and first mortgage bonds. Should the financing 
standards be eased to permit companies in registered systems to issue 
different types of securities? What are the perceived risks and 
benefits of allowing such companies to issue innovative types of 
securities? What limitations, if any, would be appropriate in this 
regard? For example, should the Commission modify requirements such as 
minimum capitalization and coverage ratios to reflect current financing 
practices?
    5. Some of the concerns described above could be addressed through 
Commission rulemaking. For example, the Commission has eased regulatory 
burdens in this area by adopting rule 52, which provides a safe harbor 
for certain routine utility financings that have been approved by the 
relevant state commission.65 Has this rule been effective? Should 
other routine utility financings be similarly exempted? To what extent 
do state regulators currently regulate utility financings, or rely on 
the Commission's review of these transactions? Do the states have 
sufficient resources and authority to undertake more extensive reviews 
in this area?
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    \6\517 CFR 250.52 (Commission approval is not required for a 
utility subsidiary of a registered holding company to issue or sell 
common stock, preferred stock, and mortgage bonds, or to issue a 
note to its parent company, for the purpose of financing its 
business as a public-utility company, where the financing 
transaction has been expressly approved by the relevant state 
commission). The Commission has requested comment on an amendment 
that would exempt additional types of utility financings. See 
Holding Co. Act Release No. 25574 (July 7, 1992), 57 FR 31156 (July 
14, 1992).
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    6. The Commission has proposed further amendments to rule 52 that 
would unconditionally exempt many nonutility financings.66 Should 
different standards apply to financings by system nonutility companies? 
For example, nonrecourse obligations are not counted toward the overall 
limit on a system's aggregate investment in exempt wholesale generators 
and foreign utility companies for purposes of rule 53 under the Act.
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    \6\6See Holding Co. Act Release No. 25574 (July 7, 1992), 57 FR 
31156 (July 14, 1992) (requesting comment on, among other things, an 
exemption for nonutility transactions that ``are solely for the 
purpose of financing the [company's] existing business'').
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    7. Under present law, intrasystem financings must mirror the terms 
of a system's external financings.67 This requirement is intended 
to protect the system's operating companies, by ensuring that the 
holding company does not profit from intrasystem transactions. Is this 
restriction still needed, particularly with respect to nonutility 
financings?
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    \6\7See, e.g., Consolidated Natural Gas Co., Holding Co. Act 
Release No. 26072 (June 27, 1994), 57 SEC Dkt. 0067 (July 26, 1994).
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    8. The Commission regulates the ability of registered holding 
companies to declare and pay dividends.68 Should the Commission 
ease the limitations imposed upon this activity?
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    \6\8See, e.g., Holding Company Act rule 46 (17 CFR 250.46).
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    9. Some have suggested that rating agencies perform a valuable 
service in highlighting potential financial instabilities. The 
Commission's administration of other securities statutes relies in some 
circumstances on the existence of investment grade ratings by 
nationally recognized statistical rating organizations.69 Should 
the Commission pursue a regulatory approach that would utilize NRSRO 
credit ratings of utility companies in a registered holding company 
system?
---------------------------------------------------------------------------

    \6\9See, e.g., 17 CFR 240.15c3-1 (net capital rule for broker-
dealers); 17 CFR 239.13(b)(2) (instructions for Securities Act 
Registration Form S-3). The Commission recently issued a release in 
which it posed questions regarding the Commission's reliance on 
NRSRO ratings. See Securities Act Release No. 7085 (Aug. 31, 1994), 
59 FR 46314 (Sept. 7, 1994). Comments on the release are available 
for public inspection in File No. S7-23-94.
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2. Intrasystem Transactions
    Under the Holding Company Act, the Commission also has broad 
authority over transactions among companies in a registered system. 
Section 13, in particular, was intended to eliminate abusive practices 
whereby utility subsidiaries were forced to pay grossly inflated costs 
for services and goods provided by an affiliate company. The profits 
from these transactions flowed to the holding company's controlling 
investors; the inflated costs were passed on as higher rates to 
consumers.70
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    \7\0Section 13 of the Act

    is designed to free public-utility companies of the tribute 
heretofore extracted from them in the performance of service, sales, 
and construction contracts by their holding companies and by 
servicing, construction, and other companies controlled by their 
holding companies. Such contracts when made freely and openly by 
parties dealing at arms' length are subject to the checks incident 
to our competitive system, but when dictated by holding companies 
sitting on both sides of the transaction are one of the most abused 
devices of the public-utility holding company system.

    S. Rep. No. 621, 74th Cong., 1st Sess. 36 (1935).
---------------------------------------------------------------------------

    The central provision, section 13(b), prohibits holding company 
subsidiaries from entering into or performing any service, sales, or 
construction contracts for associate companies unless the terms and 
conditions of the contract comply with Commission rules, regulations 
and orders.71 Under the Commission's rules, interaffiliate 
transactions must generally be conducted at cost.72
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    \7\115 U.S.C. Sec. 79m(b).
    \7\2See rules 90-92 under the Holding Company Act, 17 CFR 
250.90-92.
---------------------------------------------------------------------------

    10. Some commenters have suggested that the concerns about 
intrasystem transactions reflected in the Holding Company Act are no 
longer relevant. To what extent should the federal government regulate 
such transactions to prevent affiliate abuses?
    11. Under current law, affiliate transactions may be subject to 
multiple regulatory reviews. Companies in a registered system generally 
must obtain Commission approval to enter into affiliate contracts. The 
costs associated with these transactions may be subject to further 
review by the FERC and state regulators. The possibility of 
inconsistent determinations by the various regulators was highlighted 
by the recent Ohio Power decision, in which the U.S. Court of Appeals 
for the District of Columbia Circuit held that the FERC was precluded 
from reexamining costs established pursuant to a Commission order under 
section 13(b) of the Act.73 There are concerns that the Ohio Power 
decision can be interpreted to challenge the ability of the FERC, as 
well as state and local regulators, to protect consumers through 
traditional ratemaking proceedings. How can these concerns best be 
addressed?74 Should responsibility in this area continue to be 
apportioned between the SEC and the FERC?
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    \7\3Ohio Power Co. v. FERC, 954 F.2d 779 (D.C. Cir.), cert. 
denied, 113 S. Ct. 483 (1992).
    \7\4The Commission staff is working on a rulemaking to address 
these concerns. In addition, Congress has considered legislation to 
clarify the regulatory roles of the Commission and the FERC with 
respect to the approval of contracts and rates related to intra-
system transactions. See S. 544, 103d Cong., 1st Sess. (1993); H.R. 
4645, 103d Cong., 2d Sess. (1994).
---------------------------------------------------------------------------

    12. Several commenters at the Roundtable emphasized the need for a 
single federal arbiter, either the SEC or the FERC, in order to avoid 
inconsistent state determinations and any potential tendency among 
states to shift costs to other jurisdictions. Should federal oversight 
of these transactions be consolidated under a single regulator?
    13. What role, if any, should states play in regulating such 
transactions? What additional powers do state regulators need to be 
able to protect consumers against affiliate abuses? Some states, for 
example, may not have access to all relevant books and records.75 
Should state access be enhanced if Holding Company Act restrictions are 
to be relaxed?
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    \7\5Access to books and records is discussed further below. See 
Section IV.E infra.
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    14. Should transactions between utilities in a holding company 
system be regulated differently than transactions between a utility and 
a nonutility company in a holding company system?

B. Utility Acquisitions

    The Commission is charged with overseeing the growth and extension 
of holding companies to avoid recreating, by acquisition, the problems 
that the Act was intended to undo or eliminate.76 The Holding 
Company Act addresses these concerns by requiring Commission approval 
for most utility acquisitions. The standards for acquisition approval 
relate to the overall structure of the resulting system, and the effect 
of the acquisition upon the public interest and the interests of 
investors and consumers, the ``protected interests'' under the Act.
---------------------------------------------------------------------------

    \7\6Public Service Co. of Oklahoma, 45 S.E.C. 878, 882 (1975).
---------------------------------------------------------------------------

    15. There have been suggestions that the Commission's work in this 
area has been largely superseded by the FERC's review of utility 
mergers.77 In recent matters, the Commission has relied upon the 
FERC's analysis of certain issues that are closely linked to 
operations. The Commission requests comment on the extent to which its 
review under the standards of section 10 may duplicate the efforts of 
other regulators.
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    \7\7See section 203 of the Federal Power Act. 16 U.S.C. 
Sec. 824b. The legislative history indicates that section 203 was 
intended to complement the Holding Company Act. See S. Rep. No. 621, 
74th Cong., 1st Sess. 50 (1935) (``In this way the [FERC] would have 
authority to keep the same kind of check upon the creation of 
spheres of influence among operating companies that the Securities 
and Exchange Commission has over holding companies under [the 
Holding Company Act].'').
    Until recently, the FERC did not exercise jurisdiction over the 
merger of holding companies. See Missouri Basin Municipal Power 
Agency v. Midwest Energy Co., 53 FERC  61,368 (1990). The agency, 
however, has revised its position and announced that such mergers 
are presumptively subject to FERC approval. See Illinois Power Co., 
67 FERC  61,136 (1994).
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    16. Comment is also requested on the issue of takeover attempts of 
utility operating companies or their parent holding companies. What has 
been the effect of the Holding Company Act on such takeover attempts in 
the past? Should the Commission devise special rules for such 
takeovers?78
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    \7\8Rule 51 provides that a tender offer is subject to the 
section 9(a) restrictions on acquisitions of utility securities by 
utility affiliates, unless the tender offer meets certain 
conditions. 17 CFR 250.51.
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1. Integration
    Under section 11 of the Act, a registered holding company is 
generally limited to a single integrated public-utility system. The 
integration requirement was intended to ensure economical and efficient 
utility operations in the context of a monopoly environment. Some 
critics have challenged the continuing usefulness of this requirement, 
given the movement towards greater competition in the industry.
    17. Does the integration requirement still serve the interests of 
investors and consumers? What effect does geographic proximity have on 
a utility's efficiency of operation, particularly in view of open 
access transmission policies?79 Has the requirement of geographic 
integration hindered the development of creative solutions to the 
production and delivery of energy?
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    \7\9Although the Energy Policy Act of 1992 permits registered 
holding companies to acquire exempt wholesale generators and foreign 
utility companies without regard for physical interconnection and 
geographic proximity, the rationale for this type of exemption 
appears to be that there are no ``captive'' U.S. consumers 
associated with these new entities.
---------------------------------------------------------------------------

    18. One of the assumptions underlying the Act was that utilities 
were essentially local institutions that should be locally controlled 
and owned.80 Is this premise still valid, in view of the 
technological and regulatory developments of the past 60 years?
---------------------------------------------------------------------------

    \8\0See, e.g., 79 Cong. Rec. 8389 (1935) (statement of Sen. 
Wheeler).
---------------------------------------------------------------------------

    19. The definition of an ``integrated public-utility system'' gives 
the Commission flexibility to respond to technological advances and 
other changes in the industry.81 Should the definition be read to 
accommodate nontraditional systems? For example, one commenter has 
suggested that, as a result of open access policies, all gas companies 
in the United States could be deemed to comprise a single integrated 
system.82
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    \8\1Section 2(a)(29) (15 U.S.C. 79b(a)(29)) defines an 
``integrated public-utility system'' as follows:

    (A) As applied to electric utility companies, a system 
consisting of one or more units of generating plants and/or 
transmission lines and/or distributing facilities, whose utility 
assets, whether owned by one or more electric utility companies, are 
physically interconnected or capable of physical interconnection and 
which under normal conditions may be economically operated as a 
single interconnected and coordinated system confined in its 
operations to a single area or region, in one or more States, not so 
large as to impair (considering the state of the art and the area or 
region affected) the advantages of localized management, efficient 
operation, and the effectiveness of regulation; and
    (B) As applied to gas utility companies, a system consisting of 
one or more gas utility companies which are so located and related 
that substantial economies may be effectuated by being operated as a 
single coordinated system confined in its operations to a single 
area or region, in one or more States, not so large as to impair 
(considering the state of the art and the area or region affected) 
the advantages of localized management, efficient operation, and the 
effectiveness of regulation; Provided, That gas utility companies 
deriving natural gas from a common source of supply may be deemed to 
be included in a single area or region.
    \8\2See Columbia Gas System, Initial Comments on the Need for 
Legislative Reform (Aug. 10, 1994) (available in Public Comment File 
No. S7-19-94).
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2. Combination Systems
    The Commission and the courts have previously interpreted section 
11 of the Holding Company Act to prohibit a registered holding company 
from owning both gas and electric facilities.83 There is a tension 
between this precedent and section 8 of the Act, which appears to 
contemplate the combination of gas and electric properties.84
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    \8\3See SEC v. New England Elec. System, 384 U.S. 176, 183 
(1966); Northeast Utilities, Holding Co. Act Release No. 24908 (June 
22, 1989), 43 SEC Dkt. 2115, 2135-37 (July 5, 1989). These decisions 
focused largely on the anticompetitive effects of dual electric and 
gas ownership.
    \8\4Section 8 (15 U.S.C. 79h) provides:

    Whenever a State law prohibits, or requires approval or 
authorization of, the ownership or operation by a single company of 
the utility assets of an electric utility company and a gas utility 
company serving substantially the same territory, it shall be 
unlawful for a registered holding company, or any subsidiary company 
thereof, by use of the mails or any means or instrumentality of 
interstate commerce, or otherwise--

    (1) to take any step, without the express approval of the State 
commission of such State, which results in its having a direct or 
indirect interest in an electric utility company and a gas utility 
company serving substantially the same territory; or
    (2) if it already has any such interest, to acquire, without the 
express approval of the State commission, any direct or indirect 
interest in an electric utility company or gas utility company 
serving substantially the same territory as that served by such 
companies in which it already has an interest.

    In addition, the Commission has permitted combination systems 
under the so-called ``A-B-C clauses'' of section 11(b)(1), which 
permit a registered holding company to control additional integrated 
public-utility systems if (A) each additional system cannot be 
operated as an independent system without the loss of substantial 
economies, (B) all additional systems are located in one state, or 
in adjoining states, or in a contiguous foreign country, and (C) the 
continued combination of such systems under the control of such 
holding company is not so large (considering the state of the art 
and the area or region affected) as to impair the advantages of 
localized management, efficient operation, or the effectiveness of 
regulation. See 15 U.S.C. Sec. 79k(b)(1). See also UNITIL Corp., 
Holding Co. Act Release No. 25524 (Apr. 24, 1992), 51 SEC Dkt. 0764 
(May 12, 1992).
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    20. What are the perceived risks and benefits of allowing 
registered holding companies to own and operate a combination of gas 
and electric properties?85 Specifically, are gas and electric 
utilities sufficiently similar in operation and management that 
ownership by a single holding company could lead to gains in 
efficiency? Are there adequate protections against the potential 
anticompetitive effects of such combination systems?
---------------------------------------------------------------------------

    \8\5In a recent matter, the Commission reserved jurisdiction, 
pending the completion of the Study, over the ownership of electric 
and gas properties by a registered holding company. See CINergy 
Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994).
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3. Foreign Ownership
    Congress in 1935 did not consider the question of foreign ownership 
of U.S. public-utility companies. The Energy Policy Act of 1992 
authorized foreign ownership of U.S. exempt wholesale generators which, 
by definition, have no retail customers. The legislation did not 
address the further issue of foreign ownership of a U.S. utility with 
captive retail customers. The Commission has been asked to consider 
this issue in a pending administrative proceeding, Noverco, Inc., 
Admin. Pro. File No. 3-7097.86
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    \8\6At issue in that matter is the acquisition of a Vermont gas 
utility by a Canadian holding company. The Division of Investment 
Management opposed the acquisition, arguing that the Holding Company 
Act does not permit foreign ownership of a domestic public-utility 
company.
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    Federal law imposes various restrictions on foreign ownership of 
other regulated industries. Some laws specifically restrict foreign 
ownership,87 while others provide for such ownership subject to 
certain conditions. The Federal Aviation Act, for example, establishes 
percentage limitations on board membership and voting interests in 
determining whether an air carrier is considered a United States 
citizen.88
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    \8\7See, e.g., 16 U.S.C. 797 (power production on land and water 
controlled by the U.S. government); 42 U.S.C. 2131 - 2134 
(prohibition of foreign ownership or control of facilities that 
produce or use nuclear materials); 42 U.S.C. Sec. 6508 and 43 U.S.C. 
Sec. 1701 et seq. (oil and gas leases within the National Petroleum 
Reserve).
    \8\8See 49 U.S.C. Sec. 1301(16) (air carrier considered U.S. 
citizen if president and two-thirds of board of directors and other 
managing officers are U.S. citizens and at least 75% of voting 
interest is owned or controlled by U.S. citizens).
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    21. At the Roundtable, many commenters expressed the view that 
foreign investors should be permitted, subject to appropriate 
conditions, to acquire U.S. utilities. Should the law permit such 
foreign ownership? What conditions should be placed on foreign 
ownership?
    22. Is there a national security interest in restricting foreign 
ownership of U.S. utilities?89 Are there difficulties in obtaining 
information from foreign companies that would support limitations on 
foreign ownership? What types of safeguards or limitations on ownership 
might prevent or minimize such risks?
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    \8\9Congress has authorized the President to investigate the 
national security effects of ``foreign control of persons engaged in 
interstate commerce in the United States,'' and to suspend or 
prohibit any acquisition, merger, or takeover of such persons in 
order to protect the national security. 50 U.S.C. App. section 2170. 
The President has established the Committee on Foreign Investment in 
the United States to administer this authority. See 31 CFR 800.101 
et seq.
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    23. United States companies have acquired significant interests in 
foreign utilities over the past several years. Would restrictions on 
foreign ownership of U.S. utilities be likely to lead to restrictions 
on investment in foreign utilities by U.S. investors?

C. Diversification

    Among other things, the Holding Company Act was intended to 
simplify the structure of the utility industry by confining holding 
companies to the management of a single system of operating companies, 
without entanglement in extraneous lines of business. Section 11(b)(1) 
provides that nonutility businesses must be ``reasonably incidental, or 
economically necessary or appropriate'' to a system's core utility 
operations. The Commission and the courts have interpreted the ``other 
business'' provisions to require a ``functional relationship'' between 
a nonutility business and the utility operations of a registered 
holding company system.90 The functional relationship requirement 
was intended to focus the attention of the registered holding company 
on its operating utilities in order to protect consumers and investors 
from risks associated with unrelated businesses.
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    \9\0See Michigan Consol. Gas Co. v. SEC, 444 F.2d 913 (D.C. Cir. 
1971); CSW Credit, Inc., Holding Co. Act Release No. 25995 (Mar. 2, 
1994), 56 SEC Dkt. 0521 (Mar. 22, 1994).
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    24. At the Roundtable, many commenters expressed the opinion that 
additional latitude is necessary. To what extent do utilities hope to 
improve their economic position through diversification? How can the 
applicable standards be made more flexible while retaining appropriate 
consumer protections?
    25. What are the risks and benefits of diversification for 
consumers? What are the risks and benefits for investors? Under what 
circumstances would the risks associated with diversification outweigh 
the potential benefits? Is low earnings growth in the core utility 
business the primary justification for further diversification? Do 
other factors, such as the cyclical business patterns of other 
industries, also support diversification?
    26. Should there be limits on diversification by registered holding 
companies? If so, what types of limits are most appropriate (e.g., 
investment caps, ratios based on retained earnings or income, 
regulatory veto authority)? If not, how would increased diversification 
affect the ability of the FERC and state regulators to protect the 
interests of consumers?
    27. Has the requirement that nonutility interests be ``functionally 
related'' to a system's core utility operations demonstrably benefited 
investors and consumers of registered holding companies? What has been 
the experience of companies that were not similarly constrained?91 
Are there limits on diversification by these companies? Are these 
experiences likely to be repeated in the future, or did they result 
from unique circumstances? Do these companies face other types of 
limitations?
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    \9\1Some analysts have observed that utilities that diversified 
in the past decade did not fare as well economically as the 
registered holding companies, which were unable to diversify. See, 
e.g., Charles M. Studness, Earnings from Utility Diversification 
Ventures, Pub. Util. Fort., Sept. 1, 1992, at 28-29.
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    28. If constraints on diversification were eased, would there be a 
need for additional safeguards against cross-subsidization? What are 
the major issues in this area? For example, does a nonutility's use of 
proprietary information such as an associate utility's customer 
information raise cross-subsidization concerns?
    29. Should there be different limitations on foreign and domestic 
diversification by registered holding companies?
    30. To what extent should a utility's past experience in a 
particular type of business affect its ability to engage in similar 
activities in the future?

D. Exemptions

    There are a number of exemptions from, or exceptions to, regulation 
under the Act for certain companies. Each reflects a legislative 
determination that the purposes and policies of the Act are not 
implicated. Certain entities do not come within the ambit of the 
Act.92 Other entities are subject to limited regulation under the 
Act because they are presumptively subject to effective state 
regulation,93 or because there is limited regulatory 
concern.94 In each instance, the exemption may be revoked by the 
Commission on a finding of detriment to the interests of investors or 
consumers.
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    \9\2For example, the Commission has authority to declare that an 
entity is not an electric utility company, gas utility company, 
holding company, or subsidiary company within the meaning of the 
Act. See Holding Company Act sections 2(a)(3), 2(a)(4), 2(a)(7) and 
2(a)(8) (15 U.S.C. Secs. 79b(a)(3), b(a)(4), b(a)(7) and b(a)(8)) 
and rules thereunder.
    \9\3See Holding Company Act section 3(a)(1) (15 U.S.C. 
Sec. 79c(a)(1)) (``predominantly intrastate'' holding company); 
section 3(a)(2) (15 U.S.C. 79c(a)(2)) (holding company that is 
``predominantly a public-utility company'').
    \9\4See Holding Company Act section 3(a)(3) (15 U.S.C. 
Sec. 79c(a)(3)) (utility operations functionally related to holding 
company's primary nonutility business); section 3(a)(4) (15 U.S.C. 
Sec. 79c(a)(4)) (company is only temporarily a holding company); and 
section 3(a)(5) (15 U.S.C. Sec. 79c(a)(5)) (U.S. company holds 
essentially foreign utility operations).
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    31. The Commission generally exempts holding companies from all 
provisions of the Act except section 9(a)(2), which requires Commission 
approval for subsequent utility acquisitions. What has been the 
experience of exempt holding companies? Is there a continuing need to 
review utility acquisitions by exempt holding companies? Conversely, is 
there a need for increased Commission oversight in some areas?
    32. Do the theories underlying these exemptions remain valid? What 
other types of companies should be exempted from the Act? Should the 
Commission adopt safe harbors in this area? Should state certification 
be a condition for exemption?95
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    \9\5Columbia Gas System, Inc., for example, has suggested that 
Congress should amend section 3(a)(1) to exempt a holding company of 
which each utility subsidiary is predominantly intrastate in 
character and carries on its business substantially in a single 
state subject to regulation by a state authority as to rate and 
financial matters. Columbia Gas System, Initial Comments on the Need 
for Legislative Reform (Aug. 10, 1994). See also Post-Round Table 
Comments of Central and South West Corporation (Oct. 5, 1994).
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E. The Audit Function

    The Act gives the Commission broad authority to impose reporting 
and accounting requirements for registered holding companies. Among 
other things, the Commission may require the filing of annual, 
quarterly, and other periodic reports by registered holding companies, 
and may require such reports to be certified by an independent public 
accountant.96 The Commission can establish the form of accounts 
and prescribe uniform methods of keeping accounts for registered system 
companies.97
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    \9\6Holding Company Act section 14 (15 U.S.C. Sec. 79n).
    \9\7Holding Company Act section 15 (15 U.S.C. Sec. 79o).
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1. Books and Records
    33. As companies increasingly engage in activities not directly 
related to their core utility operations, it becomes more important for 
ratemakers to have access to the information necessary to protect 
utility consumers from the potential adverse effects of these new 
ventures. Under the Act, the Commission has broad access to the books 
and records of companies in a registered system.98 What books and 
records do state regulators and the FERC currently have authority to 
examine? What additional access is needed? How can the Commission 
facilitate access by other regulators? How can the Commission address 
confidentiality concerns raised by the companies?
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    \9\8See Holding Company Act section 15(f) (79 U.S.C. 
Sec. 79o(f)); see also rule 53 under the Holding Company Act (17 CFR 
250.53).
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2. Auditing
    34. In recent years, the Commission's audits have focused on 
service companies and nonutility subsidiaries of registered holding 
companies, including exempt wholesale generators and foreign utility 
companies. Among other things, these audits are intended to detect 
cross-subsidization and other affiliate abuses. Is there a need for an 
enhanced audit function? Is there duplication between FERC and SEC 
review? Between state and federal review? How can the Commission's 
audit program better facilitate state and FERC regulation?
3. Reporting
    Registered, and many exempt, holding companies are required to file 
annual reports under the Holding Company Act.99 In addition, 
service company subsidiaries of the registered holding companies are 
required to file annual reports. Further, registered holding companies 
must also file reports under the other federal securities laws.
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    \9\9Holding companies seeking exemption under sections 3(a)(1) 
or 3(a)(2) of the Holding Company Act may apply for a Commission 
order or, in the alternative, file a claim of exemption pursuant to 
rule 2 under the Act (17 CFR 250.2). This claim of exemption, Form 
U-3A-2, must be renewed annually.
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    35. Under the Act, registered holding companies must disclose 
financial information concerning each system company.100 What 
additional information should be required if, for example, registered 
holding companies were permitted to diversify more freely? Should this 
requirement be extended to exempt holding companies?
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    \1\00See Form U5S, which requires disclosure on a consolidating 
basis. In contrast, consolidated financial statements are required 
for registration statements and reports under other federal 
securities laws. See Article 3 of Regulation S-X (17 CFR 210.3-01 et 
seq.).
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F. Miscellaneous

1. Investment Company Issues
    36. Questions have arisen in recent years concerning investment 
companies and investment advisers that acquire the securities of 
public-utility companies. Should these entities be subject to 
regulation as utility affiliates101 or public-utility holding 
companies102 under the Act?
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    \1\01See Holding Company Act section 2(a)(11)(A) (15 U.S.C. 
Sec. 79b(a)(11)(A)) (any person owning 5 percent or more of the 
outstanding voting securities of a company is an affiliate of that 
company). Under section 9(a)(2), an affiliate of a public-utility 
company may need to obtain prior Commission approval for any 
subsequent acquisition of utility securities. 15 U.S.C. 
Sec. 79i(a)(2).
    \1\02See Holding Company Act section 2(a)(7) (15 U.S.C. 
Sec. 79b(a)(7)). Among other things, a holding company may be 
required to divest any unrelated nonutility interests. See Holding 
Company Act section 11(b)(1) (15 U.S.C. Sec. 79k(b)(1)).
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2. Other Issues
    The Holding Company Act authorizes the Commission to regulate many 
registered holding company activities that are also regulated today by 
other federal laws. For example, with respect to registered holding 
companies and subsidiaries, the Commission has broad regulatory 
authority over proxy solicitations, powers of attorney, and other types 
of authorizations;103 sales of utility securities and 
assets;104 officers and directors;105 political 
contributions;106 and lobbying.107 Comments are sought on the 
continued need for regulation under the Holding Company Act 
specifically directed at these various activities.
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    \1\03See section 12(e) (15 U.S.C. Sec. 79l(e)). Under rules 60 
through 65 (17 CFR 250.60-65), the Commission can review 
solicitation materials prior to their effectiveness and require the 
disclosure of funds spent to compensate persons who conduct 
solicitations. Rule 61 also provides that the solicitation of 
proxies is subject to the rules promulgated under section 14(a) of 
the Securities Exchange Act (15 U.S.C. Sec. 78n(a)). 17 CFR 250.61.
    \1\04See Holding Company Act section 12(d) (15 U.S.C. 
Sec. 79l(d)). This provision was enacted to prevent the piecemeal 
evasion of the reorganization accomplished under section 11 of the 
Act, and to prevent the sacrifice of investors' equity. S. Rep. No. 
621, 74th Cong., 1st Sess. 35 (1935).
    Under rule 44 (17 CFR 250.44), registered holding companies are 
required to submit proposed sales of securities or assets to the 
Commission by a declaration and to obtain an order from the 
Commission permitting such sales. The rule exempts holding companies 
from submitting such declarations regarding the sale of securities 
or of utility assets up to $5,000,000 during any calendar year if 
the acquisition does not also require Commission approval.
    \1\05Officers and directors of registered holding companies are 
subject to certain reporting requirements and trading limitations 
that are similar to those imposed by section 16 of the Securities 
Exchange Act of 1934 (15 U.S.C. Sec. 78p). See Holding Company Act 
section 17 (15 U.S.C. Sec. 79q). The Commission has adopted rules 
intended to minimize duplicative regulation. See rule 72 under the 
Holding Company Act (17 CFR 250.72) (section 17(a) deemed satisfied 
by statements of beneficial ownership filed under section 16(a) of 
the Securities Exchange Act). The Act also restricts participation 
by officers and directors of commercial and investment banks as 
officers and directors of companies in registered systems. See 
Holding Company Act section 17(c) (15 U.S.C. Sec. 79q(c)).
    \1\06Registered holding companies and their subsidiaries are 
prohibited from making campaign or political party contributions. 
Holding Company Act section 12(h) (15 U.S.C. Sec. 79l(h)). The 
Federal Election Campaign Act of 1971, however, permits registered 
holding companies to make contributions through political 
committees. See Pub. L. No. 92-225, 86 Stat. 3 (1972) (codified as 
amended at 2 U.S.C. Secs. 431-55).
    \1\07Holding Company Act section 12(i) (15 U.S.C. Sec. 79l(i)) 
requires a registered holding company or subsidiary that engages in 
lobbying efforts before the Congress, the SEC or the FERC or any of 
its members, officers, or employees to file certain forms with the 
Commission providing information such as the subject matter of and 
compensation for the lobbying efforts.
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V. Administrative Policy During the Period of Reexamination

    During the pendency of the review of comments elicited by this 
release, and while awaiting adoption of such legislative or 
administrative amendments as may result therefrom, the Commission 
intends to continue its past practice of administering the Holding 
Company Act to accommodate changes in the industry and the regulatory 
environment, within the guidelines of the statute and past 
interpretations by the courts and the Commission.

VI. Conclusion

    In reexamining the regulation of public-utility holding companies, 
the Commission is seeking comment on a number of specific regulatory 
issues. Commenters are encouraged, however, to address any other 
matters that they believe merit reexamination.

    By the Commission.

    Dated: November 2, 1994.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-27565 Filed 11-7-94; 8:45 am]
BILLING CODE 8010-01-P