[Federal Register Volume 59, Number 249 (Thursday, December 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32099]


[[Page Unknown]]

[Federal Register: December 29, 1994]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 250

[Release No. 35-26198; File No. S7-3794]
RIN 3235-AG23

 

Intrasystem Service, Sales and Construction Contracts

AGENCY: Securities and Exchange Commission.

ACTION: Proposed Rule Amendment and Proposed Rule Rescission.

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SUMMARY: The Securities and Exchange Commission is requesting comment 
on proposed amendments under the Public Utility Holding Company Act of 
1935, as amended. Under the present rule, service, sales and 
construction contracts among companies in a registered system must 
generally be performed for the benefit of associate companies at cost. 
The proposed amendment would require pricing at market if the market 
price for comparable services, construction or goods is lower than cost 
as determined under the Act. The amendment is intended to address 
consumer protection concerns arising from the decision in Ohio Power 
Co. v. FERC, 954 F.2d 779 (D.C. Cir.), cert. denied, 113 S. Ct. 483 
(1992), that public-utility company subsidiaries of registered holding 
companies could incur costs in excess of market prices in intrasystem 
transactions, to the detriment of consumers. The Commission is also 
proposing related changes in other rules governing intrasystem 
transactions.

DATES: Comments must be submitted on or before March 29, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Mail Stop 6-9, Washington, DC 20549. Comment letters should refer 
to File No. S7-3794. All comment letters 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 and Policy 
Analysis, Sidney L. Cimmet, Senior Special Counsel, Robert P. Wason, 
Chief Financial Analyst, or Markian Melnyk, Staff Attorney, Office of 
Public Utility Regulation, all at (202) 942-0545, Division of 
Investment Management, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION

I. Introduction

    The Securities and Exchange Commission (``Commission'' or ``SEC'') 
is proposing an amendment to rule 90 under the Public Utility Holding 
Company Act of 1935, as amended (``Act''), to address concerns that 
have arisen following the decision of the U.S. Court of Appeals for the 
District of Columbia Circuit in Ohio Power Co. v. FERC, 954 F.2d 7790 
(D.C. Cir.), cert. denied, 113 S.Ct. 483 (1992). The decision has been 
widely interpreted to give the Commission broad power, through its 
jurisdiction over transactions among companies in a registered holding 
company system, to affect ratemaking decisions that would otherwise be 
entrusted to the Federal Energy Regulatory Commission (``FERC'') and 
the state and local public-utility commissions.
    The Commission has historically viewed its role as supplementing, 
not supplanting, the work of federal and state ratemaking authorities. 
To the extent Ohio Power may be viewed as impairing the ability of 
those regulators to protect consumers, the Commission is committed to 
restoring the balance of regulation. To this end, the staff of the 
Commission has worked with the staff of the FERC and Congressional 
staff to craft a legislative response to the decision. The proposed 
rule is intended to supplement this effort, by closing any gaps in 
consumer protection, minimizing charges to public-utility companies for 
intrasystem transactions, and so helping to ensure the lowest rates for 
consumers.

II. The Statutory Framework

    Section 13(b) of the Act requires that service, sales and 
construction contracts among subsidiary companies in a registered 
system be performed in accordance with such terms and conditions as the 
Commission may prescribe, by rule or order, ``as necessary or 
appropriate in the public interest or for the protection of investors 
or consumers and to insure that such contracts are performed 
economically and efficiently for the benefit of such associate 
companies at cost, fairly and equitably allocated among such 
companies.''
    Prior to the passage of the Act, the fees and profits associated 
with intrasystem transactions were often ``dictated by the holding 
company sitting on both sides of the transaction'' and so, ``in nowise 
represent[ed] bargains freely and openly arrived at by subsidiary 
companies on the basis of the lowest cost in a competitive 
market.''1 The exploitation of utilities in holding company 
systems through contracts for various aspects of the utility business, 
such as engineering, construction, accounting, budgeting, and general 
management and supervision was one of the principal abuses that the Act 
was intended to remedy.2 The central purpose of section 13 is ``to 
prevent the milking of operating companies in the interest of the 
controlling holding-company groups.''3
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    \1\Report of the National Power Policy Committee, S. Doc. No. 
137, 74th Cong., 1st Sess. 5 (1935).
    \2\See section 1(b)(2) (identifying as abuses the ``excessive 
charges'' that utility subsidiaries had to pay to service and supply 
affiliates resulting from ``an absence of arm's-length bargaining'' 
and the allocation of costs among holding company subsidiaries to 
thwart effective state regulation).
    \3\See S. Rep. No. 621, 74th Cong., 1st Sess. 34 (1935).
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    Generally, if a registered system company is primarily engaged in 
performing services or construction for, or selling goods to, associate 
companies, the Commission must find, by order upon application, that 
the company is organized and conducted to ensure ``efficient and 
economical performance of services or construction or sale of goods for 
the benefit of associate companies, at cost fairly and equitably 
allocated among them.''4 Once the Commission has authorized a 
company to engage in such activities, specific transactions may 
proceed, in compliance with applicable rules under section 13(b), 
without the need for further authorization.
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    \4\Rule 88(b), adopted pursuant to section 13(b).
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    Under the rules, a subsidiary company generally must perform 
services or construction for, or sell goods to, an associate company at 
cost as determined pursuant to rule 91.5 Section 13(b)(2), 
however, authorizes the Commission, by rule or order, to grant an 
exemption from the ``at cost'' requirement in ``special or unusual'' 
circumstances. The Commission relied upon section 13(b)(2) in adopting 
present rule 92, which applies a lower-of-cost-or-market standard to 
intrasystem transfers of seller-produced goods ``to insure that the 
price of such sales shall be in line with competitive prices of 
independent sellers.''6
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    \5\Rule 90. Rule 91 addresses determination of cost and 
provides, among other things, that a transaction shall be deemed to 
be performed at not more than cost if the price (taking into account 
all charges) does not exceed a fair and equitable allocation of 
expenses (including the price paid for goods) plus reasonable 
compensation for necessary capital procured through the issuance of 
capital stock (or similar securities of an unincorporated company).
    \6\Rule 92(b). See Holding Co. Act Release No. 125 (Mar. 30, 
1936) (discussing standard for seller-produced goods). The U.S. 
Court of Appeals for the D.C. Circuit has recognized that this 
provision permits deviation from the cost standard in appropriate 
circumstances. See Ohio Power v. FERC, 954 F.2d 779, 785 n.5 (D.C. 
Cir. 1992) (``The SEC does have express statutory authority to 
deviate from the `at cost' standard when a transaction `involves[s] 
special or unusual circumstances.''').
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    Historically, the Commission has distinguished between the exercise 
of its authority under section 13(b) and federal and state ratemaking 
authority.7 Indeed, many of the Commission's orders have 
disclaimed the intent or authority to engage in ratemaking.8 It 
further appears that, prior to the Ohio Power decision, the states 
believed that they could disallow costs associated with a transaction 
subject to section 13.9
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    \7\The Commission notes in this regard that the early drafts of 
what became the Act provided for oversight of intrasystem 
transactions by the Federal Power Commission, now the FERC. See H.R. 
5423, 74th Cong., 1st Sess. (1935) section 12(a)-12(d); S. 1725, 
74th Cong., 1st Sess. (1935), section 13(g).
    \8\See, e.g., Indiana & Michigan Electric Co., Holding Co. Act 
Release No. 19986 (Apr. 14, 1977) (``nothing in this order shall be 
construed as in any manner affecting the jurisdiction of any other 
regulatory authority with respect to rates, accounting or similar 
matters in connection with the proposed transaction'').
    \9\In one matter, for example, the Arkansas Public Service 
Commission expressly rejected the argument that a determination 
under section 13 of the Act, concerning the formation of a service 
company, precluded review of the service company's billing to an 
associate public utility company in a retail rate proceeding. The 
Arkansas Commission concluded that:
    The Holding Company Act deals only with assuring that there is a 
fair allocation of service company costs among system operating 
companies, at cost. This function of the SEC in no way limits the 
ratemaking jurisdiction of state commissions.
    In the Matter of the Motion of Staff of the Arkansas Public 
Service Commission to Establish a Docket to Determine the 
Reasonableness of Arkansas Power And Light's Rates, Docket No. 84-
199-U (Apr. 3, 1985). See also D. Hawes, Utility Holding Companies 
Sec. 11.02 (1984) (``Since the charges of a service company to an 
operating utility are an element of expense, the state public 
utility commissions have generally been considered to have the 
inherent power to disallow any such charges if they are found to be 
improper.'').
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III. The Ohio Power Decision

    In the 1970s, a number of electric utilities that relied upon coal 
to meet their growing fuel needs encountered great instability in the 
price and supply of coal. To ensure a stable and secure fuel supply, 
many companies sought to acquire coal mining operations. During this 
period, the Commission authorized Ohio Power Company, a public-utility 
subsidiary of American Electric Power Company, a registered holding 
company, to acquire such operations.10
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    \1\0Ohio Power Co., Holding Co. Act Release No. 17383 (Dec. 2, 
1971). The order was issued following notice to the public. The 
Commission did not receive any requests for hearing.
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    In its initial order, the Commission authorized Southern Ohio Coal 
Company, a subsidiary of Ohio Power, to sell its coal to the utility at 
a price based upon the actual cost of production, including overhead, 
interest charges, and a reasonable rate of return on the parent 
company's investment.11 Subsequent orders stated that the price 
would ``not exceed cost.''12
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    \1\1Id. See rule 91 under the Act (determination of cost).
    \1\2See Southern Ohio Coal Co., Holding Co. Act Release No. 
20515 (Apr. 24, 1978); Holding Co. Act Release No. 21008 (Apr. 17, 
1979); Holding Co. Act Release No. 21537 (Apr. 25, 1980).
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    During the 1970s, the FERC applied a rate-of-return methodology 
that was similar to the SEC's cost-plus pricing methodology. In 1981, 
however, the FERC adopted a market-based standard for pricing captive 
coal.13 Under the market standard, a utility that purchases coal 
from an affiliate can recover only the price it would have paid under a 
comparable coal supply contract with a nonaffiliate.14 In 1982, 
when Ohio Power filed wholesale rate increases, the FERC challenged the 
pass-through of coal costs that did not satisfy a ``comparable market'' 
test.15 The FERC determined that Ohio Power had paid substantially 
more than a comparable market price for coal supplied by Southern Ohio, 
and so ordered Ohio Power to establish lower wholesale rates and to 
refund previous overcharges.
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    \1\3See Opinion 133, Public Service Co. of New Mexico, 17 
F.E.R.C. 61,123 (1981), reh'g denied, 18 F.E.R.C. 61,036 (1982), 
aff'd, 832 F.2d 1201 (10th Cir. 1987).
    \1\4Arcadia v. Ohio Power Co., 498 U.S. 73, 76 (1990).
    \1\5Ohio Power Co., 39 F.E.R.C. 61,098 (1987). Southern Ohio 
had begun mining operations in 1978.
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    On appeal to the Court of Appeals for the District of Columbia 
Circuit, the parties agreed that section 318 of the Federal Power Act 
(``FPA'') governed the dispute. Under that section, when a company is 
subject to conflicting regulation under the Act and the FPA ``with 
respect to the same subject matter,'' the requirements of the Act 
control. The Court of Appeals found that the two agencies were 
regulating the same subject matter, and that section 318 therefore 
required the FERC to defer to the SEC's approval of a cost-based price 
for the Southern Ohio coal.16
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    \1\6Ohio Power Co. v. FERC, 880 F.2d 1400 (D.C. Cir. 1989).
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    The FERC and the SEC, believing that section 318 would resolve any 
inter-agency jurisdictional conflict, asked the United States Supreme 
Court to remand the case to determine whether there was, in fact, a 
conflict between the regulatory requirements of the FPA and the Act. 
The Court, however, held that section 318 did not address the type of 
overlapping regulatory jurisdiction affecting Ohio Power, and so 
remanded the case to the Court of Appeals to determine, among other 
things, whether ``the FERC-prescribed rate is not `just and reasonable' 
because it `traps' costs which the government itself has approved--
disregarding a governmental assurance, possibly implicit in the SEC 
approvals, that Ohio Power will be permitted to recoup the cost of 
acquiring and operating [Southern Ohio Coal].''17
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    \1\7Arcadia v. Ohio Power Co., 498 U.S. at 85 (citations 
omitted).
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    The Court of Appeals, on remand, did not resolve the equitable 
``cost-trapping'' concerns. Instead, the court found, as a matter of 
law, that the FERC could not disallow the SEC-approved costs at issue 
in that matter.18 The court reasoned that the specific language of 
the orders under section 13(b) of the Act required Ohio Power to pay a 
price ``equal to cost'' for Southern Ohio coal, and concluded that 
Congress granted the SEC exclusive authority to establish prices for 
transfers of goods between companies in a registered holding company 
system.19
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    \1\8Ohio Power Co. v. FERC, 954 F.2d 779, 786 (D.C. Cir. 1992), 
cert. denied, 113 S. Ct. 483 (1992).
    \1\9Id. at 785.
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IV. Responses to Ohio Power

    The ramifications of the Ohio Power decision are unclear. The 
Commission believes that the case arose under unusual circumstances 
that are unlikely to recur.20 In that matter, the company, by 
requesting orders, effectively sought a variance from the lower-of-
cost-or-market standard of rule 92 that would otherwise have applied to 
the intrasystem sales of coal. The captive coal operations that were 
deemed necessary to provide a stable and secure fuel supply to system 
operating companies during a period of uncertain fuel supplies involved 
a significant capital investment. The Commission recognized that the 
feasibility of such a start-up operation would be dependent upon a 
consistent pricing standard, and so authorized an ``at cost'' pricing 
standard that was consistent with the standard then employed by the 
FERC. Both investors and consumers were expected to benefit.
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    \2\0See Statement of U.S. Securities and Exchange Commission 
Concerning S. 544, The Multistate Utility Company Consumer 
Protection Act of 1993, Submitted to a Hearing of the Senate 
Committee on Energy and Natural Resources, 103rd Cong., 1st Sess. at 
6 (1993); Testimony of the Honorable Richard Y. Roberts, 
Commissioner of the U.S. Securities and Exchange Commission, Before 
the Subcommittee on Energy and Power of the House Committee on 
Energy and Commerce, 103rd Cong., 2nd Sess. at 2 (1994).
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    Concerns have been expressed, however, that the decision can be 
read to impair the ability of the FERC, and the state and local 
regulators, to protect consumers through traditional ratemaking 
proceedings.21 This perception is all the more troubling because, 
historically, the Commission did not believe that the exercise of its 
authority under section 13(b) preempted federal and state ratemaking 
authority.
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    \2\1See, e.g., Testimony of The Honorable Craig A. Glazer, 
Chairman of the Public Utilities Commission of Ohio on Behalf of the 
National Association of Regulatory Utility Commissioners before the 
Subcommittee on Energy and Power of the House Committee on Energy 
and Commerce, 103rd Cong., 2nd Sess. (1994) (``While the [Ohio 
Power] decision only applied to FERC regulation of wholesale power 
sales, it clearly threatens State regulation of a far larger share 
of costs recovered in retail rates. With the FERC and State 
commissions precluded from reviewing the costs of affiliate 
contracts, the SEC will have exclusive but flawed authority to 
protect ratepayers.'').
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    The extent that Ohio Power can be read to challenge the ability of 
state and federal regulators to protect consumers, the decision is 
cause for concern and should be addressed. The Commission has 
undertaken several initiatives to deal with the issues raised by the 
decision.
    First, the Commission staff overseeing the Act has met with staff 
members of FERC and representatives of the National Association of 
Regulatory Utility Commissioners to discuss their concerns and possible 
solutions.
    Second, in response to the concerns expressed by FERC and the 
states, the Commission has undertaken an effort to arrive at a joint 
legislative solution with FERC. Earlier this year, the Commission 
approved a joint SEC-FERC staff proposal to amend section 318 of the 
FPA that would have expressly authorized the FERC to disallow costs 
incurred pursuant to section 13(b) ``if it determines that recovery of 
such costs would be inconsistent with the requirements of sections 205 
or 206 of the Federal Power Act.'' Under the proposal, there would have 
been a rebuttable presumption that such costs are just, reasonable and 
not unduly discriminatory or preferential within the meaning of the 
FPA.
    Third, to address the broader issue of the framework of regulation 
under the Act, the Commission has begun a comprehensive study with the 
goal of developing a set of recommendations for legislative or 
administrative reform.22 In connection with the study the 
Commission has solicited comment generally on the need for, and role 
of, a federal holding company statute, and on specific issues such as 
the reform of section 13 of the Act.23
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    \2\2Request for Comments on Modernization of the Regulation of 
Public-Utility Holding Companies, Holding Co. Act Release No. 26153, 
59 FR 55573 (Nov. 8, 1994).
    \2\3Comments are to be received on or before February 6, 1995.
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    Fourth, the Commission is seeking an administrative approach to the 
problems created by the Ohio Power decision. As part of this effort, 
the Commission is today proposing, for public comment, an amendment to 
rule 90 that would apply a market standard to intrasystem service, 
sales and construction contracts in ``special or unusual 
circumstances'' in which the market price for comparable goods or 
services is lower than cost as determined pursuant to rule 91.24
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    \2\4See section 13(b)(2).
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    Specifically, the rule, as proposed to be amended, prohibits a 
subsidiary company of a registered holding company from performing any 
service or construction for, or selling any goods to, any associate 
company, or entering into any contract to do so, at a price that 
exceeds cost as determined pursuant to rule 91: Provided that, if the 
purchaser might reasonably be expected to obtain comparable goods, 
services or construction elsewhere at a lower price, giving due regard 
to quality, quantity, regularity of supply, and other factors entering 
into the calculation of a fair price, the transaction would be 
permitted to be performed only at that lower price. A company may 
request an exemption, by order, from the provisions of the proposed 
rule in appropriate circumstances.25 It is anticipated that such 
an order would be issued only after consultation with other regulators.
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    \2\5See rule 100(a) (the Commission may grant an exemption if it 
appears that the requirements as applied to such transaction are not 
necessary or appropriate in the public interest or for the 
protection of investors or consumers).
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    The rule is intended to impose market discipline, to ensure that 
transactions are carried out economically and efficiently for the 
benefit of associate companies. Thus, consumers would receive the 
benefit of market prices, when such prices for comparable goods, 
services or construction are lower than cost as defined by rule 
91.26
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    \2\6The determination of cost, as provided in rule 91, includes 
direct charges related to a particular transaction, as well as a 
fair and equitable allocation of indirect expenses such as overhead 
and reasonable compensation for necessary capital.
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    The rule does not, however, purport to resolve the jurisdictional 
concerns raised by the decision. Although the rule attempts to ensure 
that transactions are priced in the first instance at the lowest 
reasonable price, it is possible that a ratemaker may subsequently seek 
to disallow some or all of the costs associated with those 
transactions. The Commission does not intend to preclude this result. 
Nonetheless, the question of whether, and to what extent, the 
Commission's determination would preempt the authority of the FERC and 
state and local regulators in this regard remains for Congress or the 
courts to decide.
    As noted above, the Court of Appeals, on remand, did not resolve 
the equitable cost-trapping concerns raised by the Supreme Court in 
Ohio Power. It is possible that this question may be the subject of 
future litigation. The requirement that intrasystem transactions be 
conducted at the lowest possible price should, however, minimize the 
potential for cost-trapping.
    The Commission proposes a number of conforming changes, including 
rescission of rules 90(b), 90(d)(2) and 92, and an amendment to rule 
82(a).27
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    \2\717 CFR 250.90(b), 250.90(d)(2), 250.92, and 250.82(a) 
(1993). Rule 82(a)'s reference to rule 92, which will be rescinded, 
should be deleted.
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V. Request for Comments

    The Commission requests comment generally on the proposed rule, and 
specific comment on the following.
    (1) The Commission requests comment whether the proposal addresses 
the ratemakers' concerns regarding Ohio Power. In particular, the 
proposed rule is intended to protect customers in registered systems by 
ensuring that intrasystem transactions are conducted at the lowest 
reasonable price. Will the rule achieve this goal?
    (2) Is this rule necessary? Do competitive pressures provide an 
automatic incentive for efficiency, resulting in lower prices for 
consumers?
    (3) If a rule is necessary, does the lower-of-cost-or-market 
standard ensure the lowest reasonable price to consumers in all 
instances? It appears, for example, that the standard may produce 
unintended results when a utility sells goods, or provides services, to 
an affiliate. Should the rule be modified according to whether a system 
utility company is the seller or purchaser of affiliate goods and 
services?28
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    \2\8In this regard, we note that the Federal Communications 
Commission has proposed a rule under which affiliate transactions 
would be recorded at the lower of cost or market when the telephone 
company is the purchaser, and the higher of cost or market when the 
telephone company is the seller. Notice of Proposed Rulemaking 
Concerning Transactions Between Carriers and Their Nonregulated 
Affiliates, Common Carrier Docket No. 93-251, FCC 93-453, 58 FR 
62080 (proposed Nov. 24, 1993).
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    (4) Similarly, should the rule apply to all types of affiliate 
transactions? Rule 90(d) currently allows a market-based standard for 
transactions between certain nonutility affiliates. The Commission has 
generally interpreted section 13 to preclude a standard that would 
allow market prices in excess of cost to be charged, directly or 
indirectly, to system utility companies. Would a lower-of-cost-or-
market standard discourage efficient cost-reducing transactions by 
precluding profits, when market is greater than cost, that would offset 
losses when market is lower than cost? Are there ``special or unusual 
circumstances'' in which a market standard should apply to services 
rendered, or goods sold, to an affiliate utility company?
    (5) For the sake of uniformity, should the Commission apply a 
market standard whenever the FERC or other ratemakers have adopted a 
market standard for certain types of transactions?
    (6) A company's decision to undertake a capital-intensive venture 
to serve associates may depend upon having a pricing standard that is 
consistent over the useful life of the capital asset. What would be the 
effect of the proposed rule upon these types of transactions, as 
distinct from system service company transactions which generally do 
not involve significant capital outlays? What would be the effect of a 
bifurcated rule that applies lower-of-cost-or-market to just non-
capital outlays and preserves the current treatment of capital outlays? 
Is such bifurcation feasible, given the implicit requirement that 
market prices be observable for all variable cost inputs?
    (7) If the costs of variable inputs, as determined pursuant to rule 
91 under the Act, are effectively held to a lower-of-cost-or-market 
standard, then proposed amended rule 90, by applying a market price 
whenever costs exceed market prices for comparable goods and services, 
would impose a lower-of-cost-or-market standard on capital inputs used. 
Would the proposed amendments, by applying lower-of-cost-or-market to 
capital inputs unfairly cause the disallowance of costs that the 
Commission had previously authorized pursuant to section 13? Should 
affiliated subsidiaries' economically and efficiently incurred capital 
costs be allowed separately from their variable operating costs which 
would be subject to the lower-of-cost-or-market? If capital costs are 
to be allowed, how can incentives be provided to utilities to ensure 
that capital investments are made in the most economic and efficient 
manner?
    (8) Does a lower-of-cost-or-market standard provide a reasonable 
and workable standard for the regulated companies? The Commission 
requests comment generally on potential compliance issues. In 
particular, should the rule prescribe specific procedures for 
determining comparable market prices or instead require a ``good 
faith'' or ``reasonable'' effort to establish a fair market value? How 
should the relevant market be defined? What record-keeping and 
reporting requirements would be needed to enable the Commission and 
other regulators to monitor these transactions?
    (9) The proposed rule raises various issues concerning the timing 
and modification of pricing for a given transaction. The Commission 
requests comment on the need for a specific periodic market-valuation 
requirement, as well as the need to ``grandfather'' certain intrasystem 
arrangements.

VI. Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b), the Chairman of the Commission has certified that the 
proposed amended rule will not, if adopted, have a significant economic 
impact on a substantial number of small entities. This certification, 
including the reasons therefor, may be obtained from Markian Melnyk at 
Mail Stop 8-2, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549.

VII. Costs and Benefits of the Proposed Amended Rule

    As an aid in the evaluation of the costs and benefits of these 
proposals, the Commission requests the views of, and other supporting 
information from, the public. It appears to the Commission that the 
benefits to be gained from a critical review of a company's in-house 
service, sales and construction contracts will outweigh the costs 
associated with implementing this proposal.

VIII. Paperwork Reduction Act

    The proposed amendments to Secs. 250.82 and 250.90, and proposed 
rescission of Sec. 250.92, are not subject to the Paperwork Reduction 
Act.

IX. Statutory Authority

    The Commission is proposing to amend Secs. 250.90 and 250.82 and to 
rescind Sec. 250.92 pursuant to sections 13 and 20 of the Act.

Text of Proposed Rule

List of Subjects in 17 CFR Part 250

    Holding companies, Utilities.
    For the reasons set out in the preamble, Part 250 of chapter II, 
title 17, of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 250--GENERAL RULES AND REGULATIONS, PUBLIC UTILITY HOLDING 
COMPANY ACT OF 1935

    1. The general authority citation for part 250 continues to read, 
in part, as follows:

    Authority: 15 U.S.C. 79c, 79f(b), 79i(c)(3), 79m and 79t, unless 
otherwise noted.
* * * * *
    2. Section 250.82 is amended by revising the first sentence of 
paragraph (a) to read as follows:


Sec. 250.82  Temporary exemption from section 13.

    (a) Every registered holding company shall be exempt from the 
provisions of section 13 (49 Stat. 825; 15 U.S.C. 79m) and the rules 
and regulations adopted thereunder for a period of 30 days after the 
date when such company shall first become a registered holding company, 
and every subsidiary of such a registered holding company and every 
company principally engaged in performing services or construction for, 
or making sales to, associates of such registered holding company shall 
likewise be exempt from such provisions for said period: Provided, 
That, during such period, such company shall comply with the provisions 
of Sec. 250.90 with respect to the performance of services or 
construction for, or the sale of goods to, any associate company.
* * * * *
    3. Section 250.90 is amended by revising the heading and paragraphs 
(a)(2) and (d) to read as set forth below, by removing paragraph (b), 
and by redesignating paragraphs (c) and (d) as paragraphs (b) and (c) 
and revising them.


Sec. 250.90  Pricing of Intrasystem Sales of Goods, Services and 
Construction.

    (a) * * *
    (2) No subsidiary company of a registered holding company 
(including a mutual service company) shall perform any service or 
construction for, or sell any goods to, any associate company thereof, 
or enter into any contract to do so, at a price that exceeds cost 
determined pursuant to Sec. 250.91: Provided that, in the special or 
unusual circumstances in which the purchaser might reasonably be 
expected to obtain comparable goods, services or construction elsewhere 
at a lower price, giving due regard to quality, quantity, regularity of 
supply, and other factors entering into the calculation of a fair 
price, such transaction shall be permitted only if performed at that 
lower price.
    (i) In the case of a sale of used goods the price shall be not more 
than cost less depreciation.
    (ii) Any charges on a basis of estimated cost shall be readjusted 
to actual cost at least annually, if for services or goods, and upon 
completion of individual projects, in case of construction.
* * * * *
    (b) If a sale of goods is merely incidental to a sale of an entire 
business or a substantial portion thereof, or to a sale of assets other 
than goods, a lump sum price for the entire transaction may include 
such goods without the assignment of a specific portion of the price to 
the cost of such goods.
    (c) The price of services, construction, or goods need not be 
limited under paragraph (a) of this section if neither the company 
performing the services or construction, or selling the goods, nor the 
associate company receiving such services or construction, or buying 
such goods, is:
    (1) a public-utility or holding company,
    (2) an investment company or investment trust, including any 
company or trust which is a medium of investment in securities for the 
benefit of a registered holding company or its employees or officers,
    (3) a company engaged in the business of selling goods to associate 
companies or performing services or construction, or
    (4) a company controlling, directly or indirectly, any company 
specified in paragraphs (c) (1), (2), or (3) of this section.


Sec. 250.92  [Removed & Reserved]

    4. Section 250.92 is removed and reserved.
    Dated: December 22, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-32099 Filed 12-28-94; 8:45 am]
BILLING CODE 8010-01-P