[Federal Register Volume 62, Number 34 (Thursday, February 20, 1997)]
[Rules and Regulations]
[Pages 7900-7919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4167]



[[Page 7899]]

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Part V





Securities and Exchange Commission





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17 CFR Parts 250 and 259



Exemption of Acquisition by Registered Public-Utility Holding Companies 
of Securities of Nonutility Companies Engaged in Certain Energy-Related 
and Gas-Related Activities; Exemption of Capital Contributions and 
Advances to Such Companies; Final Rule

  Federal Register / Vol. 62, No. 34 / Thursday, February 20, 1997 / 
Rules and Regulations  

[[Page 7900]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 250 and 259

[Release No. 35-26667; File No. S7-12-95]
RIN 3235-AG46


Exemption of Acquisition by Registered Public-Utility Holding 
Companies of Securities of Nonutility Companies Engaged in Certain 
Energy-Related and Gas-Related Activities; Exemption of Capital 
Contributions and Advances to Such Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission is adopting new rule 58 and conforming 
amendments to rules 45(b) and 52(b) under the Public Utility Holding 
Company Act of 1935 (``Holding Company Act'' or ``Act''). Rule 58 
exempts from the requirement of prior Commission approval a direct or 
indirect acquisition by a registered holding company or its subsidiary 
of an interest in an ``energy-related company,'' as defined in the 
rule, subject to certain limitations and reporting requirements; and by 
a gas registered holding company or its subsidiary of an interest in a 
``gas-related company,'' as defined in the rule, subject to certain 
reporting requirements. The rule and related rule amendments eliminate 
unnecessary regulatory limitations on investments in certain businesses 
that are closely related to the core utility business of the registered 
system while establishing disclosure and reporting requirements that 
promote the public interest and serve to protect consumers and 
investors.

EFFECTIVE DATE: March 24, 1997.

FOR FURTHER INFORMATION CONTACT: Bonnie Wilkinson, Assistant Director, 
Martha Cathey Baker, Senior Special Counsel, Sidney L. Cimmet, Senior 
Special Counsel, or Robert P. Wason, Chief Financial Analyst, all at 
(202) 942-0545, Office of Public Utility Regulation, Division of 
Investment Management, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission today is adopting rule 58 and 
related amendments to rule 45(b) and rule 52(b) (17 CFR 250.45(b) and 
250.52(b)) under the Public Utility Holding Company Act of 1935 (15 
U.S.C. 79a et seq.). The Commission issued a release proposing rule 58 
and the amendments to the existing rules on June 20, 1995.1 
Subject to certain conditions, rule 58 provides an exemption, pursuant 
to section 9(c)(3) of the Act, from the requirement of prior Commission 
approval under sections 9(a)(1) and 10, for acquisitions by registered 
holding companies and their subsidiaries of securities of companies 
engaged in activities with which the Commission is familiar as a result 
of its administrative experience and which are so closely related to 
the ordinary course of the utility business as not to require case-by-
case analysis under sections 9(a)(1) and 10.
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    \1\ Holding Co. Act Release No. 26313 (June 20, 1995), 60 FR 
33642 (June 28, 1995) (``Proposing Release'').
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    Rule 58 exempts from the requirement of prior approval the 
acquisition by a registered holding company or its subsidiary company 
of any securities of an energy-related company, subject to certain 
limitations and reporting requirements. The rule defines an energy-
related company as one that derives, or will derive, substantially all 
of its revenues from one or more activities specifically enumerated in 
the rule. The exemption provided by the rule will be available only if 
the aggregate investment by the registered holding company and its 
subsidiaries in energy-related companies does not exceed the greater of 
$50 million or 15% of consolidated capitalization.
    Rule 58 also exempts from the requirement of prior approval the 
acquisition by a gas registered holding company or its subsidiary 
company of any securities of a gas-related company, subject to certain 
reporting requirements. The rule defines a gas-related company as one 
that derives, or will derive, substantially all of its revenues from 
one or more activities permitted under the Gas Related Activities Act 
of 1990 (``GRAA'').
    Rule 58 requires a registered holding company that seeks to rely 
upon the rule to file with this Commission and each state commission 
having jurisdiction over the retail rates of the registered system 
operating companies a quarterly report disclosing acquisitions pursuant 
to the rule and certain other information required by proposed Form U-
9C-3. The reporting requirements are intended to enable the Commission 
and the state and local regulatory authorities to monitor acquisitions 
pursuant to the rule, including any transactions with rule 58 companies 
involving the operating companies in registered systems.
    The Commission is also adopting amendments to rule 45(b) and rule 
52(b), which concern financings by registered system companies, in each 
case to conform the rules to the limitations of rule 58. Rule 45(b) is 
amended to qualify the exception that the rule creates to the 
requirement of Commission approval under section 12(b) and rule 45(a) 
for capital contributions and open account advances without interest to 
a subsidiary company. As amended, the exception of rule 45(b) is 
available if the aggregate amount of such financing transactions on 
behalf of a subsidiary energy-related company conforms to the 
limitations of rule 58. Rule 52(b) is similarly amended to qualify the 
exemption that the rule provides from the requirement of prior 
Commission approval under sections 6(a) and 7 for securities issued by 
energy-related subsidiary companies to associate companies.
I. Introduction
    This rulemaking arises in the broad context of nonutility 
diversification by registered gas and electric public-utility holding 
companies. Section 9(a)(1) of the Holding Company Act requires prior 
Commission approval under the standards of section 10 for a direct or 
indirect acquisition by a registered holding company of ``any 
securities'' or ``any interest in any other business,'' i.e., any 
nonutility interest.2 Section 10(c)(1) precludes approval of an 
acquisition that would be ``detrimental to the carrying out of the 
provisions of section 11.'' Section 11, described in the legislative 
history of the Act as the ``very heart'' of the Act,3 requires the 
Commission to confine the nonutility interests of such companies to 
those that are ``reasonably incidental, or economically necessary or 
appropriate to the operations of [an] integrated public-utility 
system.'' 4 The Commission has interpreted the

[[Page 7901]]

provisions of section 11 to reflect a Congressional policy against 
nonutility activities that bear no operating or functional relationship 
to the utility operations of the registered system. 5 This 
interpretation was intended to focus the attention of the registered 
holding company on the needs of its operating utilities, and thereby 
protect consumers and investors against the risks that might be 
associated with unrelated businesses.6
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    \2\ The Commission has read the latter phrase to encompass any 
arrangement that entails the acquisition of a substantial interest 
in a nonutility business undertaking. See, e.g., Public Service Co. 
of Oklahoma, 45 S.E.C. 878, 883-4 (1975).
    \3\ S. Rep. No. 621, 74th Cong., 1st Sess. (1935) (``Senate 
Report'') at 11.
    \4\ Section 11(b)(1) of the Act. Section 11(b)(1) further 
provides that the Commission may so characterize a nonutility 
interest that it finds to be ``necessary or appropriate in the 
public interest or for the protection of investors or consumers and 
not detrimental to the proper functioning of such system. * * *''
    The interests of investors and consumers and the public interest 
are the protected interests under the Holding Company Act. The 
Commission has interpreted the public interest standard of the Act 
to extend to the interest in a sound gas and electric utility 
industry. See Eastern Utilities Assocs., Holding Co. Act Release No. 
26232 (Feb. 15, 1995).
    \5\ See generally Michigan Consolidated Gas Co., 44 S.E.C. 361, 
363-66 (1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971) (rejecting 
proposed investment in low income housing projects). See also CSW 
Credit, Inc., Holding Co. Act Release No. 25995 (Mar. 2, 1994) 
(rejecting proposed expansion of transactions with nonassociate 
companies by subsidiary engaged in factoring of utility accounts 
receivable). By its terms, section 11 applies only to registered 
holding companies. The Commission has never determined the limits on 
diversification by exempt holding companies.
    \6\ Section 11 was intended ``simply to provide a mechanism to 
create conditions under which effective Federal and State regulation 
will be possible.'' Senate Report at 11. As an historical matter, 
the statute led to the refashioning of the structure and the 
business practices of an entire industry. See, e.g., Joel Seligman, 
The Transformation of Wall Street: A History of the Securities and 
Exchange Commission and Modern Corporate Finance (rev. ed. 1995).
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    Section 9(c)(3) of the Act provides an exemption from the 
requirements of section 9(a)(1) for the acquisition of ``such 
commercial paper and other securities, within such limitations as the 
Commission may by rules and regulations or order prescribe as 
appropriate in the ordinary course of business of a registered holding 
company or subsidiary company thereof and as not detrimental to the 
public interest or the interest of investors or consumers.'' The 
Commission has previously issued orders under section 9(c)(3) exempting 
from section 9(a)(1) acquisitions of small amounts of securities of 
local industrial development corporations, affordable housing projects, 
and venture capital concerns, among others. 7 The Commission has 
also adopted rule 40(a)(5) under section 9(c)(3) to exempt such 
acquisitions from the requirements of section 9(a)(1), provided that an 
affiliate relationship does not result, and subject to certain annual 
dollar limitations. 8 The Commission has noted that section 
9(c)(3) may not be used to circumvent section 11(b)(1)'s prohibition of 
the acquisition of an interest in a business unrelated to the core 
utility business. 9
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    \7\ See, e.g., Hope Gas, Inc., Holding Co. Act Release No. 25739 
(Jan. 26, 1993) and Georgia Power Co., Holding Co. Act Release No. 
25949 (Dec. 15, 1993) (securities of local venture capital 
companies); Georgia Power Co., Holding Co. Act Release No. 26220 
(Jan. 24, 1995) and East Ohio Gas Co., Holding Co. Act Release No. 
25046 (Feb. 27, 1990) (securities of affordable housing 
partnerships); Potomac Edison Co., Holding Co. Act Release No. 25312 
(May 14, 1991) (shares of for-profit economic development 
corporation).
    \8\ Under rule 40(a)(5), a holding company or subsidiary may 
acquire up to $5 million annually of the securities of economic 
development companies created under special state laws promoting 
economic development, and up to $1 million annually in local 
industrial or nonutility enterprises.
    \9\ Michigan Consolidated Gas Co., 44 S.E.C. at 366.
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    As noted in the Proposing Release, 10 registered holding 
companies have filed numerous applications in recent years seeking 
authorization to engage in nonutility activities that the companies 
contend complement, or are natural extensions of, the evolving gas and 
electric industries. In considering these applications, the Commission 
has attempted to balance the need for regulatory change due to industry 
developments with the need for continued protection under the Act of 
the public interest and the interest of investors and consumers. 
11 The concept of a functional relationship has been expanded in 
some cases, in a manner consistent with the purposes and limitations of 
the Act, and the Commission has permitted some activities that would 
benefit the registered system in ways less tangible and direct than 
those considered and approved in orders of previous years. In some 
cases the Commission approved as part of this development extensive 
transactions with nonassociate companies and declined to limit the 
transactions to the particular service territory of the registered 
system utilities. To this extent, the Commission implicitly correlated 
the functional relationship test with changes in the industry. 12
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    \10\ 60 FR at 33643.
    \11\ The Commission in some instances imposed percentage, 
geographic or other limitations upon transactions on behalf of 
nonassociate companies. These limitations were intended to ensure 
that the particular nonutility interest would continue to benefit 
the integrated system primarily and thereby conform to the 
functional relationship requirement.
    \12\ The Commission took a more flexible approach to functional 
relationship in Southern Co., Holding Co. Act Release No. 26211 
(Dec. 30, 1994). In that case, Southern proposed to develop a 
communications system to provide services to both system companies 
and nonassociates. While only a small additional investment in the 
system was required to facilitate nonassociate transactions, a 
majority of the revenues from the system could ultimately be derived 
from these transactions. The Commission approved the proposal, 
stating that the relative investment for associate and nonassociate 
purposes is relevant to a determination of a functional 
relationship. Alternatively, the Commission found a functional 
relationship existed because the nonutility interest being acquired 
(1) would involve the sale or lease of products or skills of some 
complexity developed by the holding company at considerable expense 
for the benefit of its utility subsidiaries and not readily 
available to the rest of the public from other sources; (2) would 
generally require little or no further investment by the holding 
company; and (3) would permit the amortization of product 
development expenses with little or no risk (citing Jersey Central 
Power & Light Co., Holding Co. Act Release No. 24348 (Mar. 18, 
1987), as approved in CSW Credit, Inc., note 5 above).
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    Congress has enacted a number of important legislative measures to 
facilitate acquisitions by registered holding companies of interests to 
which section 11 was perceived to create barriers. In some instances, 
the legislation treated acquisitions of essentially utility interests 
as nonutility acquisitions for purposes of the Act, so as to avoid the 
integration requirements of section 11. 13 In other instances, the 
legislation permitted essentially nonutility activities that were 
either closely related to core operations or otherwise deemed 
appropriate for participation by registered holding companies. An 
example of recent legislation relates to nonutility activities involved 
in the supply of natural gas.
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    \13\ Under the Public Utility Regulatory Policies Act of 1978 
(``PURPA''), 16 U.S.C. 824a-3, and related legislation, a registered 
holding company can acquire an interest in ``qualifying facilities'' 
(``QFs''), as defined in the regulations under PURPA, that are 
unrelated to its core utility operations. See also the Energy Policy 
Act of 1992, discussed below.
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    In 1990, Congress enacted the Gas Related Activities Act to permit 
a gas registered holding company to engage in transportation, 
marketing, storage and other nonutility gas-related activities that are 
not functionally related to the company's business. 14 The GRAA 
provides that an acquisition of an interest in a company that engages 
in certain gas-related activities, including storage, transportation 
and wholesale sales, is deemed to meet the requirements of section 
11(b)(1) of the Act. The GRAA further provides that an acquisition of 
an interest in a company that engages in other activities relating to 
the supply of natural gas is deemed to meet the requirements of section 
11(b)(1), if the Commission finds that the acquisition is in the 
interest of consumers of the holding company system and is not 
detrimental to those consumers or to the proper functioning of the 
registered system. 15
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    \14\  Pub. L. No. 101-572, 104 Stat. 2810 (Nov. 15, 1990), 
codified as a note to section 11 of the Act.
    \15\  See, e.g., Columbia Gas System, Holding Co. Act Release 
No. 25802 (Apr. 22, 1993) (authorizing subsidiary to engage in 
marketing of natural gas). Section 2(b) of the GRAA requires the 
Commission to determine whether the proposed activities will benefit 
both the retail and the wholesale utility customers of the 
registered system.
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    In 1992, Congress acted to permit both gas and electric registered 
holding companies to acquire interests in cogeneration and small power 
production facilities, wherever located,

[[Page 7902]]

and to market and broker electric power through affiliated exempt 
wholesale generators (``EWGs''). 16 In 1992, Congress also enacted 
legislation to promote the development of alternative powered vehicles 
as a part of a national energy policy to reduce automobile emissions. 
The legislation permits gas registered holding companies to engage in 
activities related to vehicular natural gas, as defined. 17
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    \16\  Energy Policy Act, Pub. L. 102-486, 106 Stat. 2776 (1992). 
These activities of EWGs are limited primarily to the sale of 
electric power for resale.
    \17\  See Articles IV, V and VI, Energy Policy Act of 1992, Pub. 
L. 102-486, 106 Stat. 2777 (1992) (codified as a note to section 2). 
These legislative developments are discussed at greater length in 
the Proposing Release. 60 FR at 33644.
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    As a result of Congressional action, combined with initiatives of 
the Federal Energy Regulatory Commission (``FERC'') and the state and 
local ratemaking authorities, the pace of change in the gas and 
electric utility industry is accelerating. Today, the gas industry is 
largely deregulated and the electric industry is undergoing a similar 
process. 18 In addition to increasing competition at the wholesale 
level, retail electric competition is developing more rapidly than 
anticipated, due to state efforts. 19 Utilities and other 
suppliers of energy appear poised to compete in retail markets. 20 
As a result of these developments, the contemporary gas and electric 
industries no longer focus solely upon the traditional production and 
distribution functions of a regulated utility, but are instead evolving 
toward a broadly based, competitive, energy services business. 21
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    \18\  See generally The Regulation of Public-Utility Holding 
Companies, Report of the Division of Investment Management, 
Securities and Exchange Commission (June 1995) (``Report''), at 19-
22, 26-27 (surveying recent regulatory and other developments in the 
electric and gas industries). Among other things, the Report notes 
that following the Energy Policy Act, the FERC has engaged in a 
series of initiatives to encourage the development of competitive 
energy markets. Id. at 23. More recently, on April 24, 1996, the 
FERC adopted Order No. 888, FERC Stats. & Regs. ] 31,036, which 
represents a major step in the effort to increase competition in the 
generation and transmission segments of the electric industry.
    \19\  See, e.g., ``State Regulators Debate Taking a Stand on 
National Retail Wheeling Legislation'', Energy Report (March 4, 
1996) (describing state initiatives and possible support for federal 
legislation establishing retail wheeling). At the state level, for 
instance, New Hampshire has adopted a pilot program under which each 
New Hampshire utility must allow customers representing three 
percent of peak load to have access to alternative suppliers of 
electricity for two years, beginning on or about May 28, 1996. Order 
of the New Hampshire Public Utilities Commission on the Retail 
Competition Pilot Program Establishing Final Guidelines and 
Requiring Compliance Filings (Order No. 22,033, dated Feb. 28, 
1996). Other states, such as Massachusetts, Rhode Island and 
Illinois, are also implementing or considering programs to promote 
retail competition.
    \20\  The Commission has authorized registered holding companies 
to engage, through nonutility subsidiaries, in the retail marketing 
of electric power in specific states that have implemented plans and 
programs for competition in retail electric markets, see, e.g., 
Eastern Utilities Assocs., Holding Co. Act Release No. 26519 (May 
23, 1996) (authorizing retail sales of electric power pursuant to 
pilot programs in New Hampshire and Massachusetts) and, more 
recently, has authorized retail marketing of both electric power and 
natural gas on a nationwide basis, subject to compliance with 
applicable state law. SEI Holdings, Inc., Holding Co. Act Release 
No. 26581 (Sept. 26, 1996).
    \21\  The Commission acknowledged these developments in the 
Proposing Release, 60 FR at 33643, and, again, in a recent order 
authorizing a gas registered holding company to acquire an interest 
in a partnership formed to engage in the wholesale brokering and 
marketing of natural gas, electricity and other fuels. Consolidated 
Natural Gas Co., Holding Co. Act Release No. 26512 (Apr. 30, 1996). 
The order noted the growing competition among various companies, 
including exempt holding companies, as well as stand-alone utilities 
and other companies not subject to the Act, to meet increasing 
customer demand for a full range of energy options.
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    As discussed previously, the Commission has sought to respond to 
developments in the industry by expanding its concept of a functional 
relationship in a manner consistent with the purposes and limitations 
of the Act. In several recent filings, the Commission has been 
requested to reconsider some administrative restrictions employed in 
the past. In approving these requests, the Commission determined, as 
required by the Act, that its action would not be detrimental to the 
interests protected under the Act. The Commission suggested that 
various considerations, including developments in the industry, the 
Commission's familiarity with the particular nonutility activities at 
issue, the absence of significant risks inherent in the particular 
venture, the specific protections provided for consumers and the 
absence of objections by the relevant state regulators, made it 
unnecessary to adhere rigidly to the types of administrative measures 
discussed above.22 Further, a 1995 Commission staff report 
recommended that the Commission replace the use of bright-line 
limitations with a more flexible standard that would take into account 
the risks inherent in the particular venture and the specific 
protections provided for consumers.23
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    \22\ See, e.g., Consolidated Natural Gas Co., Holding Co. Act 
Release No. 26512 (approving wholesale marketing and brokering of 
natural gas, electricity and other fuels, without percentage 
limitations); Eastern Utilities Assocs., Holding Co. Act Release No. 
26232 (removing percentage limitation previously placed upon demand-
side management and energy management services business of 
registered holding company); Southern Co., Holding Co. Act Release 
No. 26211 (considering, in assessment of a functional relationship, 
the relative investment for associate and nonassociate companies).
    \23\ Report at 81-87, 91-92.
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    Finally, after the issuance of the Proposing Release, Congress 
enacted legislation amending the Act to permit registered holding 
companies, without prior Commission approval under sections 9(a)(1) and 
10, to participate in a broad range of telecommunications activities 
through a special purpose subsidiary, an ``exempt telecommunications 
company'' (``ETC'').24 Once an entity is certified as an ETC by 
the Federal Communications Commission, acquisition and retention by a 
registered holding company of an interest in the entity is exempt from 
substantive requirements under the Holding Company Act.25 As a 
result of this legislation, the provisions of proposed rule 58 
concerning telecommunications activities are no longer needed.
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    \24\ Telecommunications Act of 1996, Pub. L. 104-104, 110 Stat. 
56 (1996) (``Telecommunications Act''), codified as section 34 of 
the Act.
    \25\ The Telecommunications Act does not provide that ETCs 
themselves are exempt from regulation under the Act. See section 34. 
However, the law contemplates that the role of the Commission will 
consist largely of monitoring telecommunications investments of 
registered holding companies. The Commission is authorized to 
require reporting of investments in, and activities of, ETCs that 
are likely to have a material impact on the financial or operational 
condition of a registered holding company. See section 34(f).
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    The Commission believes that the realities of the contemporary gas 
and electric industries, and its experience in the administration of 
sections 9 and 10 of the Act, permit a recognition that certain 
activities are an integral part of the contemporary utility business, 
and so may be deemed to be activities ``in the ordinary course of 
business'' of a registered holding company within the meaning of 
section 9(c)(3) of the Act. Rule 58 identifies such activities. The 
rule is variously subject to qualifications and limitations that are 
intended to ensure that acquisitions pursuant to the rule are 
appropriate in the ordinary course of business, as contemplated by 
section 9(c)(3), are consistent with prior orders under section 9(a)(1) 
and 10, and are not detrimental to the protected interests.26
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    \26\ As noted in the Proposing Release, rule 58 is intended 
largely to encompass investments in companies engaged in activities 
of the same or substantially similar character as those approved in 
previous orders of the Commission under sections 9(a)(1) and 10. 60 
FR at 33648.
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II. Proposed Rule 58

    Rule 58 is intended to facilitate investments by registered holding 
companies in energy-related and gas-related companies. Acquisitions 
pursuant to the rule are considered to be

[[Page 7903]]

``appropriate in the ordinary course of business'' within the meaning 
of section 9(c)(3), and are thus exempt from the requirement of prior 
Commission approval under sections 9(a)(1) and 10.
    The Commission received comment letters from, or on behalf of, 
eleven registered holding companies, one exempt holding company, one 
industry trade association, and one local regulatory authority.27 
With the exception of the Council of the City of New Orleans (``New 
Orleans''), all commenters support adoption of the rule 28 and, in 
many cases, propose additional changes to expand the rule.29 New 
Orleans opposes adoption of the rule,30 and requests, in the 
alternative, a more restrictive rule. The comments received on various 
aspects of the rule are discussed below. The Commission is adopting 
rule 58 and the conforming amendments to rules 45 and 52 substantially 
as proposed, but with a number of clarifications.
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    \27\ The registered holding companies that submitted comments 
are Allegheny Power System, Inc. (``Allegheny''), American Electric 
Power Company, Inc. (``AEP''), Central and South West Corporation 
(``CSW''), Cinergy Corp. (``Cinergy''), The Columbia Gas System, 
Inc. (``Columbia''), Consolidated Natural Gas Company 
(``Consolidated''), Eastern Utilities Associates (``EUA''), Entergy 
Corporation (``Entergy''), General Public Utilities Corporation 
(``GPU''), Northeast Utilities (``Northeast'') and The Southern 
Company (``Southern''). The exempt holding company that submitted 
comments is Wisconsin Energy Corporation (``Wisconsin Energy''), and 
the industry association is the American Gas Association (``AGA''). 
The local regulator that submitted comments is the Council of the 
City of New Orleans. Copies of the comments are available for 
inspection in File No. S7-12-95 in the Commission's public reference 
room.
    \28\ See, e.g., Comments of AEP (the rule would reduce 
regulatory burdens on registered systems and permit them to compete 
in the energy industry); and Columbia (the rule eliminates 
unnecessary and costly regulatory burdens on registered systems). 
Some commenters also note that, beyond adoption of rule 58, the 
Commission should provide registered holding companies with the 
flexibility to engage in utility-related businesses without 
limitation. See, e.g., Comments of AGA (section 11 should be broadly 
interpreted to permit gas systems to enter into any business 
involving production, transmission, dissemination or marketing of 
any form of consumable energy or any business or operation based on 
the facilities, resources or expertise from the company's 
operations); and CSW (restrictions on diversification prevent 
registered systems from engaging in businesses that would benefit 
customers and investors and impede efficient evolution of the 
electric utility industry).
    \29\ For example, one commenter notes that the rule should 
generally be more flexible, so as to accommodate changes that may 
arise as the restructuring of the electric industry continues. 
Comments of Wisconsin Energy. The Commission notes, however, that 
various issues, such as those that surround the possible 
disaggregation of utility assets and horizontal integration of 
utility functions, are beyond the scope of a rule that is intended 
to exempt nonutility interests that are commonplace today and 
closely related to the core utility business. The Commission 
continues to examine the issues raised by industry restructuring, 
and will undertake any necessary or appropriate rulemaking or other 
administrative action in the future.
    \30\ New Orleans opposes the rule on many grounds. Among other 
things, New Orleans asserts that the rule constitutes ``deregulation 
of nonutility investment by registered holding companies [that] is 
unlawful and not in the public interest.'' It further asserts that 
the rule does not adequately protect consumers from 
``diversification risks and failures which are well known and 
documented in this industry.'' New Orleans states that only the 
Commission has the authority to regulate diversification and that it 
has a ``duty to protect consumers'' in this area. Comments of New 
Orleans at 3-4.
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A. Investments in Energy-Related Companies

    Rule 58(a)(1) exempts from the requirement of prior Commission 
approval under sections 9(a)(1) and 10, pursuant to section 9(c)(3), 
the acquisition by a registered holding company or its subsidiary 
company of securities of an ``energy-related company;'' provided, that 
aggregate investment (as defined) in such companies does not exceed the 
greater of 15% of consolidated capitalization or $50 million. 
Investments made prior to effectiveness of the rule are excluded for 
purposes of calculating the investment limitations.
    The Proposing Release defines an ``energy-related company'' in 
terms of the activities in which it may engage. Specifically, as 
proposed, the rule would define an energy-related company as one that 
engages in: (1) One or more of various categories of specific 
activities set forth in the rule, described below, and (2) such other 
nonutility activities as the Commission may from time to time approve 
by order upon application under sections 9 and 10, and, so doing, 
designate as energy-related for purposes of the rule. Rule 58 requires 
that an energy-related company at all times derive substantially all of 
its revenues from the activities designated in the rule.
    The energy-related activities specified in subsection (b)(1) of the 
rule as proposed were:

    (1) The rendering of energy conservation and demand-side 
management services;
    (2) The development and commercialization of electrotechnologies 
related to energy conservation, storage and conversion, energy 
efficiency, waste treatment, greenhouse gas reduction, and similar 
innovations;
    (3) The manufacture, conversion, sale and servicing of electric 
and compressed natural gas powered vehicles and ownership and 
operation of related refueling and recharging equipment;
    (4) The sale, installation, and servicing of electric and gas 
appliances for residential, commercial and industrial heating and 
lighting;
    (5) The brokering and marketing of energy commodities, including 
but not limited to electricity or natural or manufactured gas;
    (6) The production, conversion, and distribution of thermal 
energy products, such as process steam, heat, hot water, chilled 
water, air conditioning, compressed air and similar products; 
alternative fuels; and renewable energy resources;
    (7) The sale of technical, operational, management, and other 
similar kinds of services and expertise, developed in the course of 
utility operations in such areas as power plant and transmission 
system engineering, development, design and rehabilitation; 
construction; maintenance and operation; fuel procurement, delivery 
and management; environmental licensing, testing and remediation; 
and other similar areas;
    (8) The ownership or operation of QFs, and facilities necessary 
or incidental thereto, including thermal energy utilization 
facilities purchased or constructed primarily to enable the 
qualifying facility to satisfy the useful thermal output 
requirements under PURPA;
    (9) The ownership or operation of fuel procurement, 
transportation, handling and storage facilities, scrubbers, and 
resource recovery and waste water treatment facilities;
    (10) The production, transportation, distribution or storage of 
all forms of energy other than electricity and natural or 
manufactured gas;
    (11) The development and commercialization of technologies or 
processes that utilize coal waste by-products as an integral 
component of such technology or process; and
    (12) The ownership, sale, leasing or licensing of the use of 
telecommunications facilities and equipment (such as fiber optic 
lines, coaxial cable, or other communications capacity, towers and 
tower sites and other similar properties).

The rule as proposed also specifically provided a means for the 
Commission to add additional activities to the definition upon 
application in the future.
1. Definition of ``Energy-Related Company''
    a. General. The Commission received a substantial number of 
comments concerning the definition of ``energy-related company.'' 
Several commenters assert that the definition should not consist of 
enumerated categories of specific activities, but should instead be 
broad and general.31 Although this approach would offer greater 
flexibility,

[[Page 7904]]

the Commission believes that it is not consistent with the requirements 
of section 9(c)(3) of the Act. As discussed previously, that section 
provides an exemption only for acquisitions of securities that are made 
in the ordinary course of business of the registered system and that 
are not detrimental to the protected interests. Rule 58 is intended to 
encompass activities with which the Commission is familiar as a result 
of its administrative experience and that appear to be so closely 
related to the ordinary course of the contemporary utility business as 
not to require case-by-case analysis pursuant to sections 9(a)(1) and 
10. For this reason, the Commission is retaining enumerated categories 
in the rule as adopted.
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    \31\ Comments of AGA, Columbia and Consolidated. Suggested 
definitions would include any company engaged in a business based on 
or developed from the facilities, resources, technology or expertise 
of the registered system's operations (Comments of AGA and 
Columbia); and any company engaged in a business involving the 
production, transmission, dissemination or marketing of any form of 
consumable energy (Comments of AGA).
---------------------------------------------------------------------------

    Similarly, the Commission notes that the enumerated categories of 
specific energy-related activities in rule 58 are exhaustive, rather 
than illustrative. In order for a direct or indirect acquisition of 
securities by a registered holding company or its subsidiary to qualify 
for the exemption provided by the rule, the company in which the 
interest is acquired must be engaged almost exclusively in the type of 
activities specified in the rule. A registered holding company will 
continue to apply to the Commission for prior approval of any 
acquisitions concerning activities that fall outside the categories 
identified by the rule as energy-related. Further, as discussed below, 
to the extent that a company engages in activities in addition to those 
permitted under rule 58, an application will also be required.
    New Orleans suggests that the definition should include a 
requirement that the permitted activity be functionally related to the 
system's utility business under sections 10 and 11.32 Such a 
requirement is unnecessary for several reasons. First, a finding of a 
functional relationship is not required in order to qualify for an 
exemption under section 9(c)(3).33 Moreover, even though a finding 
of a functional relationship under section 11(b)(1) is not required in 
this context, each of the activities permitted under the rule as 
adopted has in many instances been found, by order upon application 
under sections 9(a)(1) and 10, to satisfy the statutory requirements, 
including those of section 11(b)(1).
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    \32\ As discussed above, the Commission has interpreted the 
provisions of section 11 of the Act, referenced in section 10(c)(1), 
to reflect a Congressional policy against nonutility activities that 
bear no operating or functional relationship to the utility 
operations of the registered system. See generally Michigan 
Consolidated Gas Co., 44 SEC 361 at 363-65.
    \33\ The Commission has determined that a transaction need not 
satisfy the standards of section 11(b)(1) in order to qualify for 
exemption under section 9(c)(3), but that section 9(c)(3) may not be 
used to circumvent the requirements of section 11(b)(1) generally. 
Id. at 366 (``Section 9(c)(3) cannot be employed to evade the 
proscription of section 11(b)(1) prohibiting the acquisition by a 
gas utility company of an interest in a business unrelated to its 
business''); but see id. at 369 (``the majority unduly constricts 
the scope of the section 9(c)(3) exemption when it holds that to be 
entitled to such exemption a transaction must also meet the 
standards of section 11(b)(1)'') (Commissioner Owens, concurring in 
part and dissenting in part) and 370 (Commissioner Smith, 
dissenting).
---------------------------------------------------------------------------

    One commenter objects to the requirement that an energy-related 
company derive ``substantially all'' of its revenues from activities 
designated as ``energy-related,'' and suggests that the rule should 
instead require that a company derive merely a stated portion, e.g., at 
least 30%, from such activities.34 The Commission notes, however, 
that this measure would permit registered holding companies to make 
sizeable investments in companies engaged primarily in novel, 
unspecified nonutility businesses. The Commission believes its 
authority to create such a broad exemption by rule under section 
9(c)(3) is subject to question.35 The Commission declines, 
therefore, to adopt this suggestion. Any acquisition of an interest in 
a nonutility business that does not derive substantially all of its 
revenues from one or more of the activities set forth in the categories 
of the rule will continue to require prior Commission approval by order 
upon application.
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    \34\ Comments of CSW.
    \35\ As noted previously, the Commission has found that section 
9(c)(3), under which rule 58 is adopted, may not be used to 
circumvent the requirements of section 11(b)(1) of the Act.
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    New Orleans objects to the proposed provision of the rule creating 
a procedure for designating additional activities to be energy-related 
by order upon application under section 10.36 New Orleans asserts 
that new activities and investments should be approved only pursuant to 
rulemaking, so that all parties have an opportunity to evaluate and 
comment upon the relationship of the new activity to the core utility 
business and the potential effects on ratepayers.
---------------------------------------------------------------------------

    \36\ This mechanism was provided in subsection (b)(1)(xiii) of 
the proposed rule.
---------------------------------------------------------------------------

    In proposing this mechanism for updating the rule, the Commission 
intended that all procedural requirements applicable to agency 
rulemaking would be observed in connection with the proposed 
designation by order of additional activities as energy-related for 
purposes of rule 58, including in particular the requirements related 
to public notice and opportunity to comment.37 On reconsideration, 
however, the Commission has determined that this provision could result 
in increased administrative burdens for both the registered holding 
companies seeking approval of new activities and the Commission staff.
---------------------------------------------------------------------------

    \37\ See e.g., the relevant provisions of the Administrative 
Procedure Act, 5 U.S.C. 553, and the Commission's rules of practice, 
17 CFR 201.192.
---------------------------------------------------------------------------

    If rulemaking is undertaken in the context of consideration of an 
application for approval of a specific nonutility investment, adherence 
to required procedures, including an extended comment period for the 
rulemaking and consideration of all views submitted, could delay 
approval of the proposed transaction that is the subject of the 
application. Further, repetitive paperwork in connection with the 
rulemaking aspects of each such application could consume extensive 
staff resources. Accordingly, this feature of proposed rule 58 has not 
been retained.38 The Commission believes, however, that future 
expansion of the scope of the rule, to reflect additional nonutility 
activities found by the Commission to satisfy the standards of the Act, 
is essential to achieve the rule's intended flexibility. The Commission 
intends to evaluate periodically the coverage of the rule in light of 
existing Commission orders under sections 9 and 10 of the Act, and 
initiate rulemaking proceedings to reflect any appropriate changes.
---------------------------------------------------------------------------

    \38\ A similar provision in the definition of ``gas-related 
company'' has also been eliminated.
---------------------------------------------------------------------------

    One commenter suggests that the definition of energy-related 
company be expanded to include companies that derive substantially all 
of their revenues from the listed activities, either directly or 
indirectly.39 The requested revision would permit a registered 
holding company system to use one or more intermediate subsidiaries 
(i.e., ``project parents'') to invest in energy-related companies, yet 
retain the benefit of the exemption afforded by the rule.40 The 
Commission believes that this suggestion is consistent with the intent 
of the rule as proposed. Use of an intermediate subsidiary could 
further insulate the holding company and its other subsidiaries, 
including utility subsidiaries, from any direct losses that could occur 
with respect to rule 58 investments. At the same time, this measure 
would offer greater flexibility in the structuring of these 
investments.

[[Page 7905]]

Accordingly, the rule, as adopted, is modified to incorporate the 
concept of indirect investment in energy-related companies through 
project parents.41
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    \39\ Comments of GPU.
    \40\ The provisions of the Act that permit use of intermediate 
holding companies in connection with investment in exempt wholesale 
generators reflect the same concept. See section 32(a)(1).
    \41\ This concept is also reflected in the definition of a gas-
related company.
---------------------------------------------------------------------------

    The Commission notes, however, that any such intermediate 
subsidiary, like the underlying energy-related companies, must derive 
``substantially all'' of its revenues from the permitted activities. If 
the company will engage in other activities, directly or indirectly, 
prior Commission approval of an investment interest in such company 
will be required.
    b. Categories of energy-related activities. The Proposing Release 
invited specific comment on whether the proposed rule should include 
additional kinds or categories of energy-related activities. One 
commenter suggests that customer financing for other energy-related 
activities should be a separate category of permitted activity for an 
energy-related company.42 The Commission notes that customer 
financing has been approved in a number of cases involving activities 
that are designated as energy-related under rule 58, and agrees that it 
may be an appropriate activity for some energy-related companies. 
However, this type of activity is better addressed in the context of 
rule 48, as discussed below. The Commission therefore declines to 
include customer financing as an energy-related activity under rule 58.
---------------------------------------------------------------------------

    \42\ Comments of Northeast.
---------------------------------------------------------------------------

    Another commenter suggests that any nonutility business in which 
the applicable state commission would allow a regulated utility or 
exempt holding company to engage or invest should be a permitted 
activity for energy-related companies.43 That a state commission 
permits utilities or holding companies that are subject to its 
jurisdiction to engage in a given nonutility activity can be a strong 
indication that the activity is appropriate, and, in a given case, it 
may be persuasive evidence that some of the standards of the Act have 
been satisfied. However, that a state commission has approved a type of 
investment does not necessarily mean that it is in the ordinary course 
of business of a registered holding company or its subsidiary for 
purposes of section 9(c)(3). The Commission does not believe that rule 
58 should incorporate such state determinations as a general matter, 
without any indication as to the nature of the approved activities or 
the relevant state law standards. Thus, the Commission will continue to 
review any such activity on a case-by-case basis, giving due 
consideration to the views of state regulators toward the activity in 
question.
---------------------------------------------------------------------------

    \43\ Comments of CSW.
---------------------------------------------------------------------------

    As proposed, the rule did not indicate clearly whether an interest 
in an energy-related company engaging in an enumerated activity could 
be acquired pursuant to the rule by companies in electric holding 
company systems, gas holding company systems, or both. As adopted, rule 
58(b)(1) has been clarified in this regard to limit the exemption 
solely to those activities that are considered to be in the ordinary 
course of the type of utility business in which a particular holding 
company system is engaged.44 Any proposal by a registered holding 
company system to acquire an interest in a company engaged in 
nonutility activities of a type not exempt under the rule for that type 
of registered system may be the subject of an application for 
Commission approval under sections 9(a) and 10.45
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    \44\ Holding company systems engaged in both the electric and 
gas utility business will be considered, for purposes of the rule, 
to be engaged only in one type of utility business, as determined by 
the type of operations that constitute the holding company's primary 
utility business.
    \45\ For example, an electric registered holding company system 
would be required to file an application and obtain authorization to 
acquire an interest in a company engaged in ownership and operation 
of refueling equipment for natural gas-powered vehicles. While 
acquisition of an interest in such a company could be exempt under 
rule 58 for a gas registered holding company system, it is not in 
the case of an electric registered holding company.
---------------------------------------------------------------------------

    Many commenters suggest specific changes or additions to the 
categories of permitted activities set forth in the definition. A 
number of comments request clarifications and propose additions to the 
list of activities permitted for an energy related company. Some, but 
not all, comments and revisions to the categories of permitted 
activities are discussed below.
    (1)Subsection (b)(1)(i): Energy and demand-side management 
services. This category of activities was defined in the Proposing 
Release to include the rendering of energy conservation and demand-side 
management services.46 The Commission has previously considered 
and approved by order under sections 9(a)(1) and 10 a broad range of 
activities relating to the business of energy management and demand-
side management, including the following: Energy audits; facility 
design and process enhancements; construction, maintenance and 
installation of, and training client personnel to operate, energy 
conservation equipment; design, implementation, monitoring and 
evaluation of energy conservation programs; development and review of 
architectural, structural and engineering drawings for energy 
efficiencies; design and specification of energy consuming equipment; 
and general advice on programs.47 Upon additional consideration, 
the Commission has concluded that ``energy conservation services'' may 
not be broad enough to cover the types of activities intended to be 
exempted under this category. The term ``energy management services'' 
more accurately reflects the scope of the exempted activity.48 The 
rule as adopted is revised accordingly. Apart from this clarification, 
the subsection is adopted as proposed.49
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    \46\ No comments were received on this subsection.
    \47\ See, e.g., Eastern Utilities Assocs., Holding Co. Act 
Release No. 26232 (Feb. 15, 1995); and Northeast Utilities, Holding 
Co. Act Release No. 25114-A (July 27, 1990).
    \48\ See, e.g., New England Electric System, Holding Co. Act 
Release No. 22719 (Nov. 19, 1982).
    \49\ This subsection is intended to encompass all consumer-
oriented activities that represent components of a holding company 
system's demand-side management and integrated-resource planning 
functions, or that are intended to reduce customer energy costs or 
lead to efficient use of energy resources by affecting energy 
consumption. Customer financing is not encompassed by this 
subsection.
---------------------------------------------------------------------------

    Companies in both electric and gas registered systems may acquire 
interests in companies engaging in the activities specified in this 
subsection.
    (2) Subsection (b)(1)(ii): development and commercialization of 
electrotechnologies.
    As used in the rule, electrotechnologies relate to energy 
conservation, storage and conversion, energy efficiency, waste 
treatment, greenhouse gas reduction and similar innovations.50 The 
Commission has, on many occasions, approved investments by electric 
registered system companies in technologies related to the electric 
utility business.51 Because the Commission has not yet considered 
proposals by registered gas system companies to engage in activities 
related to such technologies, the Commission is not prepared at this 
time to deem these activities to be appropriate in the ordinary course 
of the utility business of such systems. Accordingly, the Commission is 
revising the rule to

[[Page 7906]]

clarify that only electric registered holding companies and their 
subsidiaries are permitted to acquire companies that engage in the 
activities in this subsection. The subsection is otherwise adopted as 
proposed.
---------------------------------------------------------------------------

    \50\ No comments were received on this category of activities.
    \51\ See, e.g., American Electric Power Co., Holding Co. Act 
Release No. 25424 (Dec. 11, 1991) (acquisition of an interest in a 
company that develops, manufactures and markets efficient light 
bulbs); and Allegheny Power System, Inc., Holding Co. Act Release 
No. 26085 (July 14, 1994) (investments in technologies related to 
power conservation and storage, conservation and load management, 
environmental and waste treatment, and power-related electronic 
systems and components).
---------------------------------------------------------------------------

    (3) Subsection (b)(1)(iii): electric and gas vehicles. As proposed, 
this subsection included manufacture, conversion, sale and servicing of 
electric and compressed natural gas powered vehicles, and ownership and 
operation of related refueling and recharging equipment.52 The 
Commission has determined that the subsection should be expanded to 
include ownership, operation, sale, installation and servicing of 
refueling, recharging and conversion equipment and facilities relating 
to electric- and gas-powered vehicles,53 but should not extend to 
manufacture of such equipment and facilities or to manufacture, 
conversion and sale of the vehicles themselves.54 The Commission 
has revised the subsection as adopted to make clear its intended scope.
---------------------------------------------------------------------------

    \52\ No comments were received on this subsection.
    \53\ The Commission has issued orders authorizing broader 
involvement with respect to such activities than that reflected in 
the rule as proposed. See, e.g., Columbia Gas System, Holding Co. 
Act Release No. 26295 (May 23, 1995) (authorizing the sale, 
ownership, operation, installation and servicing of natural gas 
refueling equipment and sale of equipment and facilities for use in 
vehicle conversion); and Consolidated Natural Gas Co., Holding Co. 
Act Release No. 25615 (Aug. 27, 1992) (same).
    \54\ The Commission has not yet approved these types of 
activities by order under sections 9(a) and 10.
---------------------------------------------------------------------------

    In addition, the Commission believes, based on existing precedent, 
that it is appropriate to limit the described activities to those 
appropriate for gas registered system companies and electric registered 
system companies, respectively. The rule as adopted is revised to 
reflect this limitation.
    (4) Subsection (b)(1)(iv): appliance sales. As proposed, this 
subsection included the sale, installation and servicing of electric 
and gas appliances for residential, commercial and industrial heating 
and lighting. Comments included suggestions that this category extend 
to leasing 55 and customer financing arrangements; 56 and 
that the equipment at issue include other energy-consuming devices 
57 and equipment used for energy generation, both within and 
outside the system's service territory.58
---------------------------------------------------------------------------

    \55\ Comments of Consolidated and Northeast. Because the term 
``sale,'' as defined in section 2(a)(23) of the Act, encompasses 
dispositions by lease, the Commission believes that no change to the 
subsection is needed.
    \56\ Comments of Northeast. Northeast also raised the question 
of customer financing in a broader context, suggesting the addition 
to the rule of a category concerning the financing of other energy-
related activities. The Commission has determined to address this 
issue in the context of rule 48, as discussed below.
    \57\ Comments of CSW.
    \58\ Comments of Northeast.
---------------------------------------------------------------------------

    The Commission finds that it is appropriate to expand the types of 
equipment addressed by the rule to include other types of energy-
consuming devices.59 Historically, the Commission approved the 
activities addressed in this subsection to encourage consumption of 
electricity and gas, to promote competition among fuels and, more 
recently, to further energy conservation.60 The rule as adopted 
has been revised, consistent with these precedents, to include electric 
and gas appliances, equipment that promotes technologies that use gas 
or electricity and equipment that enables use of gas or electricity as 
an alternate fuel. Companies in both electric and gas holding company 
systems may acquire interests in companies engaging in the activities 
specified in this subsection.
---------------------------------------------------------------------------

    \59\ Prior orders in this area under sections 9(a)(1) and 10 
permit the sale, installation, servicing and/or financing of 
significantly broader categories of equipment than appliances for 
heating and lighting. See, e.g., Consolidated Natural Gas Co., 
Holding Co. Act Release No. 26234 (Feb. 23, 1995).
    \60\ See e.g., Cities Service Co., 15 S.E.C. 962 (1944); General 
Public Utilities Corp., Holding Co. Act Release No. 15184 (Feb. 9, 
1965); and Louisiana Power & Light Co., Holding Co. Act Release No. 
25445 (Dec. 26, 1991).
---------------------------------------------------------------------------

    The Commission declines to adopt the suggestion that the rule 
exempt sale, installation and servicing of generation equipment. These 
activities may involve issues of broader concern, which lie outside the 
ambit of this rulemaking.
    (5) Subsection (b)(1)(v): brokering and marketing of energy 
commodities.
    This subsection covers the brokering and marketing of energy 
commodities, including but not limited to electricity and natural or 
manufactured gas. One commenter proposes that this subsection should be 
expanded to cover energy-related commodities and should specify that it 
covers other combustible fuels in addition to electricity and 
gas.61 The Commission does not believe there is a basis to include 
``energy-related commodities'' in this context. However, the subsection 
is revised in the adopted rule to include other combustible 
fuels.62
---------------------------------------------------------------------------

    \61\ Comments of Consolidated.
    \62\ Other combustible fuels would include, for example, coal, 
oil, wood chips, oil shale, isobutane and propane.
---------------------------------------------------------------------------

    As proposed, this subsection did not indicate the markets in which 
the permitted activities could be carried out. The Commission's 
existing orders in this area extend primarily to wholesale 
markets.63 However, the Commission has authorized retail electric 
marketing activities in states with established retail wheeling 
programs,64 and, more recently, authorized retail marketing 
activities with respect to both electric power and natural gas, 
throughout the United States, subject to compliance with applicable 
state statutes, regulations and orders with respect to such 
sales.65 In view of these precedents, and in light of the rapid 
development of competition in retail markets, as discussed above, this 
subsection is intended to cover activities in both wholesale and retail 
markets that are in compliance with applicable law.
---------------------------------------------------------------------------

    \63\ See, e.g., Consolidated Natural Gas Co., Holding Co. Act 
Release No. 26512 (Apr. 30, 1996) (approving wholesale marketing of 
energy commodities, but reserving jurisdiction over retail marketing 
activities until such time as state programs permitting such 
activities are implemented).
    \64\ See, e.g., Eastern Utilities Assocs., Holding Co. Act 
Release No. 26519 (May 23, 1996) (participation in retail electric 
pilot programs in New Hampshire and Massachusetts); and New England 
Electric System, Holding Co. Act Release No. 26520 (May 23, 1996) 
(same).
    \65\ SEI Holdings, Inc., Holding Co. Act Release No. 26581 
(Sept. 26, 1996). The Commission noted that industry trends and 
competitive pressures make it important for registered system 
companies to be poised to compete in new markets as they are 
created, and that such participation appears to promote the goals of 
U.S. energy policy, including increased competition and lower 
utility rates.
---------------------------------------------------------------------------

    This subsection, as proposed, also did not indicate whether a 
registered holding company could acquire an interest in a company 
dealing in all energy commodities or only in electric power or natural 
gas, as appropriate. At the time the Proposing Release was issued, the 
Commission's previous orders had, for the most part, limited 
participation in gas marketing and brokering activities to gas holding 
company systems, and electric marketing and brokering activities to 
electric holding company systems. Since that time, however, the 
Commission has considered and approved several proposals by registered 
holding companies to engage in the brokering and marketing of energy 
commodities, including but not limited to electricity and natural or 
manufactured gas.66 The rule as adopted permits companies in both 
electric and gas systems to acquire interests in

[[Page 7907]]

companies engaging in the activities described in this subsection.
---------------------------------------------------------------------------

    \66\ Consolidated Natural Gas Co., Holding Co. Act Release No. 
26512 (Apr. 30, 1996); UNITIL Corp., Holding Co. Act Release No. 
26527 (May 31, 1996); and SEI Holdings, Inc., Holding Co. Act 
Release No. 26581 (Sept. 26, 1996). Other companies in both electric 
and gas holding company systems are also seeking similar 
authorizations. See, e.g., National Fuel Resources, Inc., File No. 
70-8651.
---------------------------------------------------------------------------

    One commenter recommends that the Commission revise the subsection 
to clarify that it concerns both regulated and unregulated 
activities.67 Since rule 58 addresses only the acquisition of 
securities of nonutility companies engaged in specified activities, 
this comment is not reflected in the rule.
---------------------------------------------------------------------------

    \67\ Comments of CSW. Unregulated activities are stated to be 
those that are for the benefit of shareholders.
---------------------------------------------------------------------------

    Several commenters suggest that the specified activities should 
include ``risk management activities'' 68 and ``market hedging 
tools.'' 69 The Commission has, in several instances, considered 
such activities in connection with the brokering and marketing of 
energy commodities. 70 In each case, the order was conditioned on 
representations that hedging tools would be used only to minimize risks 
associated with contracts for purchase or sale of energy commodities 
and would not be used to engage in speculation. Such activities are a 
means of limiting the risks associated with marketing of energy 
commodities and, subject to compliance with the limitations noted 
above, may be engaged in as part of the activities covered by this 
subsection.
---------------------------------------------------------------------------

    \68\ Comments of CSW.
    \69\ Comments of Cinergy.
    \70\ See, e.g., SEI Holdings, Inc., Holding Co. Act Release No. 
26581 (Sept. 26, 1996); Consolidated Natural Gas Co., Holding Co. 
Act Release No. 25926 (Nov. 16, 1993); and Consolidated Natural Gas 
Co., Holding Co. Act Release No. 26512.
---------------------------------------------------------------------------

    (6) Subsection (b)(1)(vi): Thermal energy products. This subsection 
addresses the production, conversion and distribution of thermal energy 
products,71 alternative fuels and renewable energy resources. The 
Commission received one comment, suggesting that sale of such products 
and servicing of thermal energy facilities should be added to the 
permitted activities.72 The rule as adopted has been revised to 
include these suggestions. The rule has also been revised to limit 
availability of this subsection to electric registered holding company 
systems.
---------------------------------------------------------------------------

    \71\ Examples given in the rule include process steam, heat, hot 
water, chilled water, air conditioning, compressed air and similar 
products.
    \72\ Comments of GPU.
---------------------------------------------------------------------------

    (7) Subsection (b)(1)(vii): sale of services and expertise. This 
section addresses the sale of technical, operational, management and 
other kinds of services and expertise developed in the course of 
utility operations.73 Commenters offer various requests for 
expansion of this category.
---------------------------------------------------------------------------

    \73\ Examples cited in the proposed rule include power plant and 
transmission system engineering, development, design and 
rehabilitation; construction; maintenance and operation; fuel 
procurement, delivery and management; environmental licensing, 
testing and remediation; and other similar areas. The activities 
contemplated by the rule do not extend to any that would render a 
company a public-utility company under the Act. See section 2(a)(3), 
(4) and (5).
---------------------------------------------------------------------------

    One registered holding company suggests that the category should 
also include development, production, marketing and financing of such 
services and expertise.74 The Commission notes, however, that the 
subsection is intended to address services and expertise that exist as 
a result of system utility operations. The development and production 
of such services and expertise, solely for the purpose of sale, are 
outside its scope. In addition, the marketing of such services and 
expertise is implicit in the concept of sale, and thus need not be 
specifically mentioned. As discussed below, the Commission believes 
that customer financing is better addressed in the context of rule 48. 
The Commission declines to adopt these proposed revisions to the rule.
---------------------------------------------------------------------------

    \74\ Comments of Consolidated.
---------------------------------------------------------------------------

    Two commenters suggest that expertise and services developed in the 
course of nonutility operations should also be included.75 While 
expertise related to some nonutility services may be appropriate for 
inclusion in the activities covered by the rule, the Commission 
believes that there is not yet an adequate basis for including them, 
and will continue to consider proposals on a case-by-case basis.
---------------------------------------------------------------------------

    \75\ Comments of AGA and Columbia.
---------------------------------------------------------------------------

    A registered holding company suggests an expansion of this category 
to include the sale of excess goods and assets.76 The Commission 
declines to adopt this suggestion with respect to sale of utility 
assets and resources by a nonutility company, primarily because those 
activities could involve significant consumer protection issues, and 
could also raise restructuring issues that are beyond the scope of the 
rule. Some sales of excess nonutility assets and resources may be a 
legitimate activity for rule 58 companies, but the Commission does not 
believe that there is, as yet, an adequate basis for inclusion of such 
activities in the rule. Consideration of these types of activities will 
continue to be done on a case-by-case basis.
---------------------------------------------------------------------------

    \76\ Comments of CSW.
---------------------------------------------------------------------------

    Another registered holding company proposes that this category of 
the rule be expanded to include the sale of administrative services and 
equipment related to services and expertise.77 The Commission 
notes, however, that administrative services, to the extent they are 
within the scope of management services, need not be expressly 
addressed. In addition, as discussed above, sales by a nonutility 
subsidiary company of equipment used in utility operations, even 
equipment related to the service being sold, could raise consumer 
protection issues. Accordingly, the Commission declines to accept these 
suggestions.
---------------------------------------------------------------------------

    \77\ Comments of Northeast.
---------------------------------------------------------------------------

    Commenters also suggest that the list of examples of the types of 
services and expertise covered by this subsection be expanded.78 
As discussed previously, the rule is intended to encompass the types of 
activities that may be considered to be in the ordinary course of 
business of a registered holding company. In this regard, the 
Commission has taken into account its experience in administering 
sections 9(a)(1) and 10 of the Act. To the extent that the commenters 
request the inclusion of activities with which the Commission has 
little or no familiarity, it is appropriate to continue case-by-case 
review. Accordingly, the Commission declines to modify the adopted rule 
as these commenters request.
---------------------------------------------------------------------------

    \78\ Comments of Consolidated (gas exploration, development, 
transmission or storage system design); CSW (waste management 
activities); GPU (consulting and training); Cinergy (revenue 
security and employee safety); and Northeast (distribution system 
engineering, development design and rehabilitation, environmental 
services, and transportation and fleet services).
---------------------------------------------------------------------------

    It should also be noted in this regard that only those type of 
services and expertise that are uniquely utility-related are intended 
to fall within this category of activity. Activities that are more 
generic are not intended to be a permitted activity for energy-related 
companies.79
---------------------------------------------------------------------------

    \79\ For instance, expertise in billing and customer service may 
be developed in the course of utility operations. These types of 
activities are not, however, uniquely utility-related and, thus, are 
not encompassed by this subsection.
---------------------------------------------------------------------------

    The Commission notes in connection with this subsection that any 
use by a system nonutility company of personnel or other resources of 
an associate public-utility company raises issues under section 13 of 
the Act and rules thereunder 80 relating to pricing of

[[Page 7908]]

intrasystem transactions. Persons engaging in these activities and 
relying upon the exemption provided by the rule are advised to consider 
these requirements.
---------------------------------------------------------------------------

    \80\ Section 13 prohibits registered holding companies from 
entering into or performing any contract for service, construction 
or the sale of goods with any associate utility or service company, 
except as may be permitted by rule in special circumstances or in 
the ordinary course of business. Section 13 also provides that 
subsidiaries of registered holding companies, in entering into or 
performing any such contracts, must comply with any limitations 
imposed by the Commission as necessary or appropriate 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. Rules 85 through 92, adopted under 
section 13, specify the situations in which such transactions are 
permitted and generally provide that, with some exceptions, such 
contracts must be performed at cost.
---------------------------------------------------------------------------

    Companies in both electric and gas registered systems may acquire 
interests in companies engaging in the activities specified in this 
subsection. As adopted, this subsection has been revised only to the 
extent necessary to eliminate redundant language.
    (8) Subsection (b)(1)(viii): ownership and operation of QFs. This 
subsection, as proposed, included ownership or operation of QFs and of 
facilities necessary or incidental thereto.81 The Commission 
received one comment on this provision, proposing that development of 
QFs also be included in the rule.82 The Commission has approved 
project development activities in connection with QFs in a number of 
cases.83 Such activities are implicit in the subsection as 
proposed, and the subsection has been revised to include them 
specifically.
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    \81\ Such facilities are stated to include thermal energy 
utilization facilities purchased or constructed primarily to enable 
the QF to satisfy the useful thermal output requirements under PURPA 
and regulations thereunder.
    \82\ Comments of GPU.
    \83\ See, e.g., Southern Co., Holding Co. Act Release No. 26212 
(Dec. 30, 1994); and Allegheny Power System, Inc., Holding Co. Act 
Release No. 26229 (Feb. 3, 1995).
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    After careful review of the precedent in this area under sections 
9(a)(1) and 10, the Commission has also determined that it is 
appropriate to make clear that this subsection is intended to include 
ownership and operation of only the types of incidental facilities that 
are required in order to meet the requirements of PURPA.84 
Subsection (viii), as adopted, has been revised accordingly.
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    \84\ The Commission has authorized registered holding companies 
to invest in an 18 acre thermal host greenhouse, Central and South 
West Corp., Holding Co. Act Release No. 25399 (Nov. 1, 1991), and an 
integrated carbon dioxide plant steam host, Central and South West 
Corp., Holding Co. Act Release Nos. 25477 (Feb. 18, 1992) and 25983 
(Jan. 31, 1994). In each instance, the Commission found that the 
incidental facility was necessary to the operation of the QF. The 
Commission believes that it is appropriate for the subsection of the 
rule to extend to investments in any type of incidental facility 
that is needed for a facility to attain QF status.
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    Companies in both electric and gas registered systems may acquire 
interests in companies engaging in the activities specified in this 
subsection.
    (9) Subsection (b)(1)(ix): fuel facilities, scrubbers, and resource 
recovery and waste water treatment facilities. As proposed, this 
subsection included ownership and operation of fuel procurement, 
transportation, handling and storage facilities, scrubbers, and 
resource recovery and waste water treatment facilities.85 One 
registered holding company suggests that servicing of such facilities 
should also be permitted.86 The subsection has been revised 
expressly to permit such activity.
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    \85\ This subsection is not intended to encompass ownership or 
operation of any facilities that would cause an energy-related 
company to become an electric utility company under the Act. See 
section 2(a)(3).
    \86\ Comments of GPU.
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    Another registered holding company suggests that this subsection 
should be expanded to permit use of excess system assets, such as 
office equipment and space and excess space in billing 
envelopes.87 The Commission believes that this request is more 
appropriately directed to subsection (b)(1)(vii) and has addressed it 
in that context.
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    \87\ Comments of Northeast.
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    The Commission orders on which inclusion of these activities is 
based relate to generation of electricity. As a result, the rule's 
exemption for the acquisition of a company that engages in activities 
described in this subsection is available only for companies in 
electric registered systems.88
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    \88\ Many activities related to procurement, transportation and 
storage of natural gas for sale are permitted for gas-related 
companies, as discussed below.
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    (10) Subsection (b)(1)(x): production, transportation, distribution 
or storage of other forms of energy. The activities in this subsection 
concern all forms of energy other than electricity and natural or 
manufactured gas. Commenting registered holding companies suggest that 
the permitted activities should also include the sale of these forms of 
energy,89 as well as all activities in the supply chain concerning 
them, including development, exploration, research and testing.90 
The commenters further propose that the subsection specifically include 
sources of energy.91
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    \89\ Comments of GPU.
    \90\ Comments of AGA, CSW and Columbia.
    \91\ Comments of CSW.
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    The Commission has concluded that the activities in this proposed 
subsection duplicate in many respects the activities included in other 
subsections of the rule as adopted.92 Accordingly, this subsection 
has been eliminated in the final rule.
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    \92\ For instance, subsection (v) covers marketing of energy 
commodities; subsection (vi) covers production and sale of thermal 
energy products, alternative fuels and renewable energy resources; 
subsection (ix) covers ownership or operation of fuel procurement, 
transportation, handling and storage facilities; and subsection (x) 
covers utilization of certain waste by-products of the generation of 
electricity. In addition, as discussed below, production of other 
fuels may be a permitted activity for gas-related companies under 
some circumstances.
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    (11) Subsection (b)(1)(xi): coal waste by-products. This subsection 
includes development and commercialization of technologies or processes 
that utilize coal waste by-products as an integral component. Two 
registered holding companies comment on this subsection and request 
that it be expanded to include all waste products and by-products of 
generation of electricity and natural gas production, as well as 
investments in facilities and equipment used in processes to improve 
wastes and by-products or convert them into useful goods.93 The 
Commission notes that, to date, it has considered only cases involving 
coal waste products and by-products of electric generation, 94 and 
this subsection is adopted as proposed.
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    \93\  Comments of Allegheny and Southern.
    \94\  See Jersey Central Power & Light Co., Holding Co. Act 
Release No. 24373 (April 16, 1987) (investment in company developing 
a waste coal-fired generating unit); American Electric Power Co., 
Holding Co. Act Release No. 26014 (March 30, 1994) (acquisition of 
securities of subsidiary that develops backfill material using fly 
ash, a coal waste by-product); and New England Electric System, 
Holding Co. Act Release No. 26277 (April 26, 1995) (investment in a 
venture that installs equipment to separate unburned carbon from 
coal ash).
---------------------------------------------------------------------------

    Only companies in electric holding company systems may acquire an 
interest in a company engaged in the activities in this subsection.
    (12) Subsection (b)(1)(xii): telecommunications facilities. This 
subsection addresses the ownership, sale, leasing or licensing of the 
use of telecommunications facilities and equipment. The Commission 
received numerous comments on the advisability and scope of this part 
of the rule.95 In view of the passage in 1996 of the 
Telecommunications Act, legislation that exempts from the requirement 
of prior Commission approval the acquisition and retention by a 
registered holding company of interests in companies engaged in a broad 
range of telecommunications activities and businesses, these activities 
are not included in the adopted rule.
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    \95\  Registered holding companies generally commented that this 
section should be expanded to cover a broader range of 
telecommunication services and products. Comments of CSW, Entergy 
and GPU. New Orleans, however, commented that this subsection should 
be eliminated as not in the public interest due to possible cross-
subsidization problems and lack of relationship to the core utility 
business.
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2. Limitation on Investment
    As noted above, the exemption of rule 58 is available so long as 
aggregate

[[Page 7909]]

investment by a registered holding company and its subsidiaries in 
energy-related companies does not exceed the greater of 15% of 
consolidated capitalization or $50 million. As proposed, investments in 
such companies made pursuant to Commission order prior to the effective 
date of the rule would be excluded for purposes of calculating the 
limitation. In the Proposing Release, the Commission requested specific 
comment on (1) whether the proposed investment limitation is reasonable 
under the circumstances; (2) whether a different measure of financial 
capacity, such as consolidated retained earnings, should be used 
instead; and (3) whether it is appropriate to exclude prior investments 
for purposes of the rule.
    a. Need for a limitation. Some commenters consider an investment 
limitation to be unnecessary. They note that the types of energy-
related businesses specified in the rule are closely related to the 
utility industry 96 and that competitive markets and the financial 
condition of any particular registered holding company establish 
prudent limits on diversification.97 They state, further, that the 
Commission can monitor the effects of diversification through its 
review of holding company financing,98 and they note that 
consumers are protected against potential cross-subsidization by 
various factors, including the at-cost rules under section 13 of the 
Act,99 rate regulation and the companies' need to be 
competitive.100 Several commenters, however, state that if the 
Commission determines that a limitation is appropriate, the proposed 
limitation is reasonable.101 These commenters consider a more 
restrictive standard to be unnecessary.102
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    \96\ Comments of Entergy.
    \97\ Comments of AGA and Columbia.
    \98\ Comments of Columbia and Entergy.
    \99\ Rules 90, 91 and 92 under the Act, 17 CFR 250.90, 250.91 
and 250.92.
    \100\ Comments of AGA.
    \101\ Comments of Consolidated, GPU and Southern.
    \102\ Comments of AGA and GPU.
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    The Commission continues to believe that it is appropriate to limit 
the aggregate investment of a registered holding company in energy-
related companies pursuant to the rule. Section 9(c)(3) by its terms 
contemplates that the Commission will condition rules thereunder upon 
such limitations as it may prescribe as appropriate in the ordinary 
business of a registered holding company or its subsidiary company and 
not detrimental to the public interest or the interest of investors or 
consumers. An aggregate limitation upon investments pursuant to the 
rule is appropriate to ensure that acquisitions of interests in energy-
related companies are not so material as to depart from the statutory 
concept of transactions in the ordinary course of business or to raise 
the possibility of detriment to the protected interests.103 The 
Commission may revisit the need for an investment limitation in rule 58 
in the future, after gaining experience with the use and effects of the 
exemption provided by the rule.
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    \103\ The Commission notes that its jurisdiction over the 
issuance and sale of securities by a registered holding company and 
its subsidiaries to finance investments in nonutility companies 
pursuant to rule 58 will also serve to minimize risk and to enable 
the Commission to monitor the effects of nonutility activities on 
the registered system. The Commission has jurisdiction over such 
financing transactions under sections 6 and 7 of the Act, and must 
consider certain effects of proposed financings in determining 
whether the standards of the Act have been satisfied. See the 
Proposing Release, 60 FR at 33646.
---------------------------------------------------------------------------

    b. Basis for calculation of the limitation. New Orleans asserts 
that either consolidated retained earnings or consolidated equity is 
preferable to consolidated capitalization as a means to measure 
shareholder funds that are not needed to meet the registered system's 
utility service obligations.
    The commenting registered holding companies oppose a standard based 
on consolidated retained earnings. They note that such earnings can 
vary significantly as a result of factors that do not affect financial 
health, such as accounting changes and other nonrecurring 
items.104 They also assert that consolidated retained earnings are 
primarily an indicator of ability to raise new capital economically, 
and, to this extent, lack relevance for the purpose of setting a 
limitation upon investment under the rule.105
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    \104\ One registered holding company also observes in this 
regard that a standard based on consolidated retained earnings would 
create uncertainty in a registered holding company system's 
planning. Comments of CSW.
    \105\ Comments of Southern.
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    The registered holding companies generally support a standard based 
on consolidated capitalization, because, in their view, it offers 
flexibility 106 and a meaningful measure of system financial 
integrity.107 These commenters explain that a flexible standard is 
appropriate because the activities encompassed by the exemption of the 
rule are closely related to the utility business and have been reviewed 
and approved by order of the Commission.108
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    \106\ Comments of GPU and Northeast.
    \107\ Comments of Allegheny and Southern.
    \108\ Comments of CSW.
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    The Commission recently considered a question of the appropriate 
basis for an investment limitation in the context of EWGs. Rule 53, 
adopted under section 32 of the Act, provides a safe harbor for 
approval of proposals to issue securities related to investments in 
EWGs.109 To qualify for the rule's safe harbor, the aggregate 
investment of the registered holding company system in EWGs and foreign 
utility companies (``FUCOs'') cannot exceed 50% of the system's 
consolidated retained earnings. In adopting rule 53, the Commission 
determined that retained earnings was an appropriate standard against 
which to measure the safe harbor limitation on these exempt 
investments.
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    \109\ Section 32 of the Act provides that, in determining 
whether to approve a proposed issuance of securities related to EWG 
investments, the Commission may not make certain negative findings 
under the Act unless the proposed transaction would have a 
substantial adverse impact on the financial integrity of the 
registered holding company system. Section 32(h)(3) and (4). Section 
32 also directs the Commission to adopt regulations that would set 
forth ``the actions which would be considered to have a substantial 
adverse impact on the financial integrity of the registered holding 
company system [and] ensure that the [financing in question] has no 
adverse impact on any utility subsidiary or its customers, or on the 
ability of State commissions to protect such subsidiary or customers 
* * *.'' Section 32(h)(6). Rule 53 was adopted to effectuate these 
provisions. If the rule's safe harbor are satisfied, the Commission 
is precluded from making the negative findings specified in section 
32(h)(3) and (4).
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    Although the Commission has found a standard based on consolidated 
retained earnings to be appropriate in the context of rule 53, it does 
not follow that it is appropriate in the case of investments in energy-
related companies. The Commission noted in adopting the safe harbor 
provisions of rule 53 that investments in EWGs and FUCOs were new 
activities, and that the potential risks, which could not accurately be 
predicted, could conceivably be significant. The Commission rejected a 
test based on consolidated capitalization, because it would not 
directly reflect the effect of losses in connection with an EWG or FUCO 
investment. The Commission concluded that the level of retained 
earnings, which is directly sensitive to losses, was a more appropriate 
standard against which to measure these investments.110 In 
contrast, as discussed previously, investments under rule 58 are deemed 
to be appropriate within the ordinary course of business of registered 
systems and consistent with the

[[Page 7910]]

protected interests under the Act. The risks are more predictable and 
presumably more limited. In rejecting alternative bases for the 
investment limitation in rule 53, the Commission also noted that 
consolidated capitalization ``relates principally to the capital 
structure created to fund the holding company system's domestic 
utilities * * *,'' 111 and thus is not a particularly appropriate 
standard against which to measure investments in EWGs and FUCOs. This 
is not the case for acquisitions of interests in energy-related 
companies, whose activities, as previously discussed, are closely 
related to the core utility business of a registered system. Because 
total system capitalization is intended to support the system's utility 
business, the Commission regards it as an appropriate measure of the 
amount of capital that may be invested in utility-related businesses. 
In addition, because consolidated capitalization is a more stable base 
of calculation than retained earnings, the amount of the investment cap 
would be less subject to fluctuations.
---------------------------------------------------------------------------

    \110\ The Commission stated that ``(b)ecause EWGs and foreign 
utility companies are still novel entities, there is little 
experience on which to base predictions concerning their performance 
* * *. [R]etained earnings would best capture the effect upon a 
system's financial condition of reverses in EWG and foreign utility 
company investments.'' Holding Co. Act Release No. 25886 (Sept. 23, 
1993), 58 FR 51488, 51493 (Oct. 1, 1993).
    \111\ Id.
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    The test in rule 53 was formulated to effectuate the specific 
protections required by section 32.112 In contrast, section 
9(c)(3), under which rule 58 is adopted, deals with a different type of 
investment than that covered by section 32, i.e., one appropriate in 
the ``ordinary course of business.'' Investors and consumers are 
protected not only through the investment cap for energy-related 
investments, but also through this limitation.
---------------------------------------------------------------------------

    \112\ In discussing the investment limitation, the Commission 
stated that rule 53 is ``intended to protect system financial 
integrity and so protect utilities and their ratepayers.'' A ``key 
factor'' in this regard is the ability of the holding company, which 
is a source of capital for its utility subsidiaries, to obtain 
financing at a reasonable cost. Retained earnings was chosen as the 
basis of the safe harbor investment limitation, among other things, 
because they are linked to the cost of capital, and thus provide a 
``fundamental protection.'' 58 FR at 51492.
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    In view of these considerations, the Commission believes that a 
consolidated capitalization standard is appropriate for purposes of a 
limitation on exempt investments under rule 58. The final rule 
incorporates this standard.
    c. Treatment of previous investments. The Commission received a 
significant number of comments concerning the proposed exclusion of 
prior investments in energy-related companies, made pursuant to 
Commission order, from the calculation of aggregate investment for 
purposes of the limitation of the rule. New Orleans and one registered 
holding company 113 assert that such prior investments should be 
included in the calculation.114 The majority of commenters, 
however, consider the ``grandfathering'' of these investments to be 
appropriate. These commenters note that the investments have been found 
to satisfy the requirements of the Act.115 Further, the commenters 
assert that inclusion of prior investments would penalize those 
registered holding companies that have successful energy-related 
programs in place,116 and also prevent registered holding 
companies from competing on an equal footing with exempt holding 
companies and companies not subject to the Act.117 Finally, the 
commenters contend that it would be burdensome to require a 
determination of whether or not various prior investments are energy-
related for purposes of rule 58.118
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    \113\  Comments of Allegheny.
    \114\  New Orleans believes that the total of existing 
investments and future investments under rule 58 would be so great 
as to be detrimental to ratepayers. As of December 31, 1995, 
registered holding companies had invested approximately $1.25 
billion in companies that would be energy-related companies within 
the meaning of rule 58(a). As of that date, such investments 
represented approximately 1.6% of consolidated capitalization of the 
registered systems having such investments. On an individual basis, 
no registered system had more than approximately 5.6% of its 
consolidated capitalization invested in energy-related companies as 
of December 31, 1995. The Commission believes that this level of 
investment does not raise any significant issues of risks to the 
interests protected by the Act. The Commission also notes that 
because registered holding companies often make these investments 
through nonutility subsidiaries, system operating companies and 
their ratepayers are insulated from exposure to any direct losses 
that may result from the investments.
    \115\ Comments of CSW, EUA, GPU and Northeast.
    \116\ Comments of EUA.
    \117\ Comments of AGA.
    \118\ Comments of EUA and GPU.
---------------------------------------------------------------------------

    Several commenters propose that the limitation should exclude not 
only investments made pursuant to Commission order prior to the rule, 
but also previously-authorized investments that have not yet been made 
as of the date of the rule.\119\ One commenter suggests, in addition, 
that investments that the Commission may authorize by future order 
should be excluded for purposes of the limitation of rule 58.\120\ This 
commenter also requests the Commission to clarify whether previous 
investments in energy-related companies pursuant to other exemptions 
should be excluded from calculation of the investment limit. At issue 
are investments by registered holding companies in their nonutility 
subsidiaries pursuant to rules 52 and 45, as recently amended.\121\
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    \119\ Comments of AEP, Consolidated, EUA, Entergy and Southern.
    \120\ Comments of Entergy.
    \121\ See Holding Co. Act Release No. 26311 (June 20, 1995), 60 
FR 33634 (June 28, 1995) (exempting from the requirement of prior 
Commission approval capital contributions and non-interest bearing 
open account advances by parent companies to nonutility 
subsidiaries, and the issuance by nonutility subsidiaries and 
acquisition by their parents of specified types of securities, the 
proceeds of which are for use in the subsidiary's existing 
business).
---------------------------------------------------------------------------

    The Commission believes that all amounts that have actually been 
invested in energy-related companies pursuant to Commission order prior 
to the date of effectiveness of the rule should be excluded from the 
calculation of aggregate investment under rule 58. The Commission also 
believes it is appropriate to exclude from the calculation all 
investments made prior to that date pursuant to available 
exemptions.\122\
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    \122\ Under this interpretation, amounts invested by a 
registered system company in an energy-related company during the 
period between adoption and effectiveness will be excluded for 
purposes of calculating aggregate investment; provided, that such 
investments are used solely to fund activities in which the company 
has previously been authorized to engage by order of the Commission 
and that such amounts are not disproportionate to the current 
operations of such business. Since these additional investments will 
fund activities that the Commission has previously considered and 
approved under sections 9(a)(1) and 10 of the Act, the Commission 
does not believe that their exclusion raises any significant 
concerns with respect to protection of the interests covered by the 
Act. Any investments in existing energy-related companies made prior 
to the effective date of the rule must be reported on Form U-9C-3.
---------------------------------------------------------------------------

    The Commission believes, however, that any investment made after 
the date of effectiveness of rule 58 should be included for purposes of 
calculation of the limitation, regardless of whether these investments 
are made pursuant to prior Commission order or available 
exemptions.\123\ As for the question of whether investments approved by 
order after the date of effectiveness of rule 58 should be excluded 
from the calculation, the Commission believes that the issue is best 
addressed on a case-by-case basis. This approach will enable the 
Commission to consider the effect of the particular transaction on the 
registered system.
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    \123\ As discussed below, the Commission is adopting amendments 
to rules 52 and 45 that subject investments in energy-related 
companies to the same limitations under these rules as are 
applicable under rule 58. These limits apply to all energy-related 
companies, regardless of whether the initial investment in such 
company was made pursuant to order or pursuant to rule 58.
---------------------------------------------------------------------------

    d. Definition of ``aggregate investment''. Rule 58, as proposed, 
defined ``aggregate investment'' to mean all amounts invested, or 
committed to be invested, in energy-related companies, for which there 
is recourse, directly or indirectly, to the registered holding company. 
The Commission

[[Page 7911]]

stated that the term was intended to have a meaning similar to that 
provided by rule 53.\124\ The language of the definition, as proposed, 
did not specifically include amounts invested by subsidiary companies 
that are without guaranty by, or other recourse to, the parent holding 
company. Such investments, which are exempt under subsection (a)(1) 
from the requirement of Commission approval, are intended to be 
included in calculating the limitation under the rule. The rule as 
adopted reflects this intent.\125\
---------------------------------------------------------------------------

    \124\ See Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58 
FR 51488 (Oct. 1, 1993). Rule 53(a)(1)(i) (17 CFR 250.53(a)(1)(i)) 
provides that aggregate investment includes all amounts invested, or 
committed to be invested, in exempt wholesale generators and foreign 
utility companies, for which there is recourse, directly or 
indirectly, to the registered holding company. Among other things, 
the term includes, but is not limited to, preliminary development 
expenses that culminate in the acquisition of an exempt wholesale 
generator or a foreign utility company; and the fair market value of 
assets acquired by an exempt wholesale generator or a foreign 
utility company from a system company (other than an exempt 
wholesale generator or a foreign utility company).
    \125\ An indirect investment made through an intermediate 
subsidiary will only be counted once in the calculation of aggregate 
investment.
---------------------------------------------------------------------------

    In terms of the types of investments encompassed, the scope of the 
definition of ``aggregate investment'' in rule 58 is intended to be 
similar to that of rule 53. The term thus would include amounts 
actually invested in an energy-related company, as well as amounts 
committed to be invested under the terms of subscription agreements, or 
stand-by or other similar capital funding agreements.

B. Investments by Gas Registered Holding Companies in Gas-Related 
Companies

    Rule 58(a)(2) exempts from the requirement of prior Commission 
approval under sections 9(a)(1) and 10, pursuant to section 9(c)(3), 
the acquisition by a gas registered holding company or its subsidiary 
company of securities of a ``gas-related company,'' as defined. Such 
acquisitions are not subject to any limitation as to amount. A ``gas-
related company'' is defined in the Proposing Release as a company that 
derives, or will derive, substantially all of its revenues from 
activities permitted under sections 2(a) and 2(b) of the GRAA and such 
other nonutility activities as the Commission may, from time to time, 
by order upon application under sections 9 and 10 and section 2(b) of 
the GRAA, authorize a gas registered holding company to engage in, and, 
in so doing, designate as gas-related for purposes of rule 58. The rule 
contemplates that gas-related companies, like energy-related companies, 
will derive substantially all of their revenues from the respective 
activities designated in the rule.
1. Definition of ``Gas-Related Company''
    Some commenters question whether registered holding companies that 
have only electric utility operations or that have both electric and 
gas utility operations should be entitled to invest in gas-related 
companies on an unlimited basis under the rule.\126\ The portion of 
rule 58 that permits such investments reflects and depends upon 
findings under the GRAA that certain activities satisfy the 
requirements of sections 10 and 11 of the Act. The GRAA is available 
only to companies in systems in which the holding company is registered 
solely by reason of ownership of voting securities of gas utility 
companies. As a result, other registered holding company systems are 
not entitled to the benefits of the GRAA or the related provisions of 
rule 58. The language of the rule has been clarified to make this 
explicit.
---------------------------------------------------------------------------

    \126\ Comments of CSW and Cinergy.
---------------------------------------------------------------------------

    Several commenters raise an issue concerning the scope of the 
definition of gas-related company.\127\ The definition, as proposed, 
can be read to include companies that derive substantially all of their 
revenues from only the activities specified in section 2(a) of GRAA and 
activities found by the Commission, by order, to satisfy the 
requirements of section 2(b) of GRAA. This interpretation would not, 
however, take into account that some activities specifically identified 
in section 2(b) as being related to the supply of natural gas (i.e., 
exploration, development, production, marketing and manufacture of 
natural or manufactured gas) were found by the Commission to be 
permissible under the standards of the Act prior to the enactment of 
the GRAA, and are not the subject of a subsequent order under that 
legislation. Under rule 58 as proposed, a gas holding company system 
might be required to obtain an order under section 2(b) of GRAA in 
order for these gas-related activities to be covered by the rule's 
exemption.
---------------------------------------------------------------------------

    \127\ Comments of AGA, Columbia and Consolidated.
---------------------------------------------------------------------------

    Activities of the type specified in section 2(b) of GRAA were 
intended to be included in the activities in which gas-related 
companies may engage, regardless of whether a Commission order 
approving such activities was issued under GRAA \128\ or under sections 
9(a) and 10 prior to the enactment of GRAA,\129\ or both.\130\ In all 
of these cases, the Commission found that the standards of sections 10 
and 11 were satisfied, either through traditional analysis or by means 
of the assumptions created by GRAA. The rule has been clarified to 
accomplish this result.
---------------------------------------------------------------------------

    \128\ See, e.g., Consolidated Natural Gas Co., Holding Co. Act 
Release No. 26363 (Aug. 28, 1995) (sale of propane services); 
Columbia Gas System, Holding Co. Act Release No. 25802 (April 22, 
1993) (marketing natural gas to nonaffiliates); National Fuel Gas 
Co., Holding Co. Act Release No. 25437 (Dec. 20, 1991) (marketing, 
storage and transportation of natural gas and pricing consultation); 
National Fuel Gas Co., Holding Co. Act Release No. 25265 (March 5, 
1991) (exploration and development of gas supply reserves); CNG 
Transmission Corp., Holding Co. Act Release No. 25239 (Jan. 9, 1991) 
(development, construction and operation of natural gas pipelines); 
and Consolidated Natural Gas Co., Holding Co. Act Release No. 25224 
(Dec. 21, 1990) (development of technologies to enhance the supply, 
transportation and utilization of natural gas).
    \129\ See, e.g., National Fuel Gas Co., Holding Co. Act Release 
No. 24381 (May 1, 1987) (drilling and well maintenance and related 
services); Consolidated Natural Gas Co., Holding Co. Act Release No. 
23023 (Aug. 5, 1983) (sale of natural gas byproducts); National Fuel 
Gas Co., Holding Co. Act Release No. 21903 (Feb. 2, 1981) 
(construction of underground storage facilities); and Columbia Gas 
System, Holding Co. Act Release No. 13610 (Nov. 27, 1957) 
(extraction and sale of natural gas byproducts).
    \130\ See, e.g., National Fuel Gas Co., Holding Co. Act Release 
Nos. 26181 (Dec. 6, 1994) and 24381 (May 1, 1987) (pipeline 
construction and maintenance and related services).
---------------------------------------------------------------------------

    Several commenters also note that other activities associated with 
the natural gas supply chain, such as exploration and production of 
associated petroleum, were contemplated to be included in GRAA-
permitted activities and should be included in the activities permitted 
to be engaged in by gas-related companies under rule 58.\131\ The 
Commission agrees that the activities in which a gas-related company 
may engage under rule 58 should be consistent with those contemplated 
by GRAA.\132\
---------------------------------------------------------------------------

    \131\ Comments of AGA and Columbia.
    \132\ See, e.g., 136 Cong. Rec. S17586 (Oct. 27, 1990) 
(Statement of Sen. D'Amato) (production and sale of oil and other 
petroleum products may constitute ``production'' for purposes of 
GRAA, if oil and natural gas are present in the geologic formation 
underlying a particular well).
---------------------------------------------------------------------------

    The definition, as proposed, contained a provision permitting 
addition of new activities by order upon application. As discussed 
above in the context of energy-related companies, this provision has 
not been included in the rule as adopted.
    The definition of a gas-related company has also been revised, as 
was the definition of an energy-related company, to permit indirect 
investment through intermediate subsidiaries.
2. Limitation on Investments in Gas-Related Companies
    The Commission requested comment on whether a limitation on 
investments

[[Page 7912]]

in gas-related companies is appropriate. Two commenters state that no 
such limitation is needed.133 They note, among other things, that 
because many activities involved in the gas business are nonutility 
interests for purposes of the Act, investment in such activities is 
necessarily significant, and any limitation would limit the usefulness 
of the rule for gas registered systems.134 In view of the 
Congressional intent, evidenced by the GRAA, that gas systems be 
permitted to engage in certain gas-related activities without 
restriction as to amount, the Commission has not revised the rule to 
add a limitation on those activities.135
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    \133\ Comments of AGA and Consolidated.
    \134\ Comments of Consolidated.
    \135\ See the Proposing Release, 60 FR at 33647.
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C. Other Conditions to Use of the Rule

    The Commission sought comment on whether use of rule 58 should be 
conditioned on meeting other types of requirements, and the form such 
conditions should take. Commenters were invited to address the need for 
additional conditions to use of the rule 58 exemption based on, for 
example, the financial condition of the registered holding company 
system, the extent of losses experienced by the system over recent 
periods and prior bankruptcies of system companies.
    The registered holding companies and the American Gas Association 
uniformly state, for various reasons, that no further conditions to use 
of rule 58 are needed in order for investors and consumers to be 
protected from risks.136 One holding company suggests that, if 
conditions are imposed, they should be based on current or future facts 
rather than past circumstances.137 New Orleans, however, disagrees 
and suggests that use of the rule be conditioned on a demonstration of 
financial viability by the holding company. New Orleans also recommends 
that consumer safeguards in the form of audit authority and access to 
books and records for ratemaking authorities be added.138
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    \136\ Comments of Allegheny (the rule's investment limitation 
protects investors and ratepayers, and the Commission and the states 
can monitor activities through Form U-9C-3); AEP (the investment 
limitation and the fact that these activities are conducted 
separately from utility operations provide protections); AGA (each 
venture should be viewed on a prospective basis, not on the basis of 
past experience; adverse developments can be monitored through 
reports filed with the Commission, the FERC and state regulators); 
Columbia (a ``no bankruptcy'' condition is contrary to the policy of 
the bankruptcy laws, and bankruptcy is irrelevant where the company 
emerges with an investment grade rating); Consolidated (the 
Commission can invoke its jurisdiction if problems are perceived); 
Entergy (the Commission can monitor investments in the context of 
holding company financing approvals); GPU (the state regulators and 
the FERC can protect ratepayers from risk); and Southern (the rule 
addresses all conditions necessary for satisfaction of section 10; 
no other conditions are needed to protect against cross-
subsidization, since rule 58 companies are still subject to the 
intrasystem transaction provisions of the Act and such transactions 
must be reported on Form U-9C-3).
    \137\ Comments of Columbia.
    \138\ Comments of New Orleans.
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    For several reasons, the Commission believes that no additional 
conditions are required in order to protect investors and consumers 
from the risks of these diversified activities. First, as noted above, 
the rule addresses activities that the Commission has determined 
previously to be so closely related to utility operations as to be in 
the ordinary course of business of a registered holding company and 
that, in many instances, have been approved in prior orders of the 
Commission under sections 9(a)(1) and 10. In addition, reasonable 
limitations on exempt investments in energy-related companies are an 
important feature of the rule, designed to limit the financial exposure 
of the registered system. Finally, through the filing of Form U-9C-3 
under rule 58(c), both the Commission and interested state regulators 
will have the opportunity to monitor the nature and scope of each 
registered holding company system's activities pursuant to rule 58. In 
view of these safeguards, the Commission is adopting the rule without 
further condition.

III. Proposed Amendments to Rule 52 and Rule 45

    The Proposing Release requested comment on proposed amendments to 
rules 52 and 45 under the Act, to conform the rules to rule 58.139 
Rule 52(b), as currently in effect, exempts from the requirement of 
Commission approval under sections 6(a) and 7 of the Act the issue and 
sale by a nonutility subsidiary of a registered holding company of any 
common stock, preferred stock, bond, note or other form of 
indebtedness, subject to certain conditions. Rule 52(d) further exempts 
from the requirement of prior Commission approval under sections 
9(a)(1) and 10 of the Act the acquisition by a registered holding 
company of any such security, provided that the transaction does not 
involve the formation of a new subsidiary.140
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    \139\ See the discussion of the need for these amendments in the 
Proposing Release. 60 FR at 33648.
    \140\ The Commission has proposed to amend rule 52 further to 
expand the types of securities that qualify for the exemption. See 
Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR 33640 (June 
28, 1995).
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    The exemptions under rule 52(b) and 52(d), both as previously in 
effect and as proposed to be amended, are broader than the exemption in 
proposed rule 58. Accordingly, the Commission proposed to amend rule 52 
to add a limitation on the aggregate amount of securities that may be 
issued and sold by energy-related companies and acquired by associate 
companies, consistent with the limitation of rule 58.
    Rule 45(b) currently exempts from the requirement of Commission 
approval under section 12(b) of the Act and rule 45(a) thereunder 
certain investments in existing subsidiaries by means of cash capital 
contributions or open account advances. In particular, rule 45(b)(4) 
exempts without limitation any capital contribution or open account 
advance without interest to a subsidiary company. Because this 
provision is inconsistent with the investment limitation in rule 58, 
the Commission proposed to amend rule 45(b)(4) to conform the aggregate 
amount of capital contributions and open account advances that may be 
made to energy-related subsidiary companies to the limitations of rule 
58.
    Few commenters express any view on the proposed amendments to rules 
52 and 45. Two registered holding companies support adoption of the 
amendments.141 An exempt holding company opposes the amendments as 
unnecessary and as potentially limiting the Commission's flexibility 
under rule 58.142
---------------------------------------------------------------------------

    \141\ Comments of Allegheny and Southern.
    \142\ Comments of Wisconsin Energy.
---------------------------------------------------------------------------

    Without the proposed conforming changes, registered holding 
companies could use rule 58 to make initial acquisitions of securities 
of energy-related companies, and arguably could use rules 45 and 52 to 
make additional unlimited acquisitions of securities of such companies, 
in each instance without Commission approval. To permit this result 
would render meaningless the limitations of rule 58 on investments in 
energy-related companies. In addition, a question would arise whether 
section 9(c)(3), under which rule 58 is promulgated, permits such 
acquisitions of securities without Commission oversight. The Commission 
believes that the proposed amendments are necessary in order to carry 
out the purposes of rule 58. Accordingly, the amendments are adopted in 
the form proposed.

IV. Other Proposals in Connection With Rule 58

    Several commenters propose changes to other rules or Commission 
orders to

[[Page 7913]]

conform them to the provisions of rule 58. These proposals are 
discussed below.

A. Rule 16

    As currently in effect, rule 16 under the Act provides that any 
company and its affiliates will be exempt from all obligations, duties 
or liabilities imposed by the Act upon subsidiaries or affiliates of a 
registered holding company, if (1) the company is not a public-utility 
company, (2) the company engages primarily in certain specified 
activities related to the supply of natural or manufactured gas, (3) 
less than 50% of the voting stock of the company is owned by registered 
holding companies, and (4) the acquisition by a registered holding 
company of an interest in the company was approved by the Commission 
upon application.143 Several commenters suggest that the coverage 
of the rule 16 exemption be extended to energy-related companies and 
gas-related companies, as defined in rule 58, and their 
affiliates.144
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    \143\ 17 CFR 250.16.
    \144\ Comments of Columbia and Consolidated.
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    The Commission believes that a proposal to amend rule 16 to make it 
consistent with rule 58, and to enhance its usefulness (which is 
limited at present), should be considered. Such an amendment, however, 
is beyond the scope of this rulemaking.

B. Existing Limitations on Investments in Energy-Related Companies

    In the past, the Commission in some instances incorporated 
conditions and limitations in certain orders approving energy-related 
activities, including a requirement that an energy-related company 
derive at least 50% of its revenues from associate companies or from 
specified geographic areas.145 As discussed above, these 
geographic and other limitations are not included in rule 58 as 
adopted.146 One commenter suggests that any 50% limitation in an 
order approving the acquisition of an interest in a business that would 
qualify as energy-related under rule 58 should cease to apply by virtue 
of the rule, without any need for an amended order.147
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    \145\ For instance, the Commission has conditioned approval of 
acquisitions of energy services and demand-side management 
businesses on a requirement that at least 50% of revenues be derived 
from a specified geographic area, within the system's retail service 
territory and contiguous areas. See, e.g., Entergy Corp., Holding 
Co. Act Release No. 25718 (Dec. 28, 1992); and Northeast Utilities, 
Holding Co. Act Release No. 25114 (July 3, 1990). In addition, the 
registered system was required in some instances to divest its 
equity interest in the nonutility business within a specified 
period. See, e.g., Entergy Corp., Holding Co. Act Release No. 25718.
    \146\ The rule does not incorporate geographic limitations based 
on the retail service territory of the registered holding company 
system. However, based on existing precedent and the markets with 
which the Commission is currently familiar, activities permitted by 
the rule are limited to the United States. The rule has been 
modified to make this limitation clear.
    \147\ Comments of CSW.
---------------------------------------------------------------------------

    The Commission agrees that, where an order approving the 
acquisition or retention of a nonutility business by a registered 
holding company system includes a limitation of the type discussed 
above, and such limitation would not apply if the interest held by the 
registered holding company system were acquired under rule 58, the 
limitation in the order should no longer apply. These conditions are 
effectively superseded by rule 58, and no further filings and orders 
are needed to eliminate them.

C. Associate Transactions

    Several commenters suggest that transactions between an energy-
related company and some or all of its associate companies should be 
exempt from the requirements of the Act and rules thereunder,148 
including the rules under section 13(b) of the Act. Section 13(b) of 
the Act generally requires that intrasystem service, sales and 
construction contracts be performed in accordance with such terms and 
conditions as the Commission may prescribe, either 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.'' Entergy Corporation suggests that rule 87 under the Act 
149 be amended to provide that transactions subject to section 
13(b) do not require an order upon application. General Public 
Utilities Corporation suggests an amendment of rule 90 150 to 
exclude transactions between an energy-related company and its 
associates from the at-cost standards. Northeast Utilities suggests 
that all transactions between an energy-related company and its 
affiliates should be exempt from the Act.
---------------------------------------------------------------------------

    \148\ Comments of Entergy, GPU and Northeast.
    \149\ Rule 87 specifies the cases in which subsidiaries of 
registered holding companies may perform services or construction 
for or sell goods to associate companies, subject to compliance with 
the ``at cost'' rules and certain other conditions.
    \150\ Rule 90 sets forth the general rule that any transaction 
involving service, construction or sale of goods between a 
subsidiary of a registered holding company and an associate company 
must be performed at cost, as defined, and provides exceptions.
---------------------------------------------------------------------------

    Section 13(b) authorizes the Commission to exempt conditionally or 
unconditionally such transactions as it may determine, by rule or 
order, to be consistent with the protected interests, if such 
transactions ``(1) are with any associate company which does not 
derive, directly or indirectly, any material part of its income from 
sources within the United States and which is not a public-utility 
company operating within the United States, or (2) involve special or 
unusual circumstances or are not in the ordinary course of business.'' 
It does not appear that the Commission has previously considered its 
authority to grant other exemptions from the requirements of section 
13(b).
    The commenters' requests are beyond the scope of the proposed 
rulemaking. In addition, the Commission believes that it would be 
inappropriate to address the issues raised in the limited context of 
the activities addressed in rule 58. Nonutility companies in registered 
holding company systems have, in any event, substantial freedom to 
engage in transactions with associate nonutility companies under rule 
87(b)(1).151 The Commission declines to accept the commenters' 
suggestions.
---------------------------------------------------------------------------

    \151\ 17 CFR 250.87(b)(1).
---------------------------------------------------------------------------

D. Rule 48

    One commenter suggests that rule 48 under the Act be amended to 
permit energy-related companies to engage in customer financing in 
connection with their energy-related businesses.152 As noted 
previously, customer financing in connection with certain energy-
related activities has been approved by order in the past. The 
Commission considered whether customer financing should be included in 
rule 58, either as a separate energy-related activity or as an aspect 
of other energy-related activities.153 However, it appears that an 
amendment to rule 48 would be the appropriate measure to address this 
question.154
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    \152\ Comments of GPU. Rule 48 currently exempts financing in 
connection with purchases by utility customers of standard electric 
and gas appliances. 17 CFR 250.48.
    \153\ See comments of Northeast.
    \154\ Amendment of rule 48 is beyond the scope of this 
rulemaking.
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V. Quarterly Reports on Form U-9C-3

    The Commission proposed that registered systems provide periodic 
information with respect to all energy-related and gas-related company 
subsidiaries on Form U-9C-3, in lieu of the separate rule 24 
certificates required under the terms of any outstanding Commission 
orders.155 This procedure

[[Page 7914]]

was intended to lessen the reporting burden for holding companies, and 
to make available a single, comprehensive report covering all energy-
related and gas-related business activities of a registered holding 
company for the interested state commissions, with which the report 
must also be filed.
---------------------------------------------------------------------------

    \155\ See the Proposing Release, 60 FR at 33648. Cinergy 
suggests that, to the extent that information on securities 
issuances is reported on Form U-9C-3, reports under rule 52 on Form 
U-6B-2 reporting the same information should not be required. Such a 
change may be appropriate, but is beyond the scope of this 
rulemaking.
---------------------------------------------------------------------------

    The Commission requested comment on the form and content of Form U-
9C-3. In particular, the Commission sought comment on whether a report 
should be filed quarterly or on a semiannual or other basis. The 
Commission also requested comment on whether any special reporting 
requirements may be needed with respect to the revenues derived from 
any activities of such companies other than the activities specified in 
the rule, to ensure that energy-related and gas-related companies 
derive substantially all of their revenue from such activities, as 
required by the rule.
    Several commenters assert that the form should not be adopted, 
because Form U5S provides sufficient information to enable regulators 
to protect consumers 156 and could be modified to require 
reporting of rule 58 investments in a manner similar to treatment of 
exempt wholesale generators and foreign utility companies.157 One 
commenter suggests that no reporting requirements are needed with 
respect to investments in gas-related companies, since there are no 
limits on these investments.158 Most commenters suggest that 
changes be made to the form if it is adopted.
---------------------------------------------------------------------------

    \156\ Comments of AGA.
    \157\ Comments of Columbia. See Item 9 of Form U5S, 17 CFR 
259.5s.
    \158\ Comments of Columbia.
---------------------------------------------------------------------------

    With respect to the timing of reporting, one commenter, New 
Orleans,159 specifically approves of quarterly filings, on the 
ground that regulators need quarterly reports in order to monitor 
activities and institute corrective action. Most industry commenters, 
however, object to quarterly filings, because the information in the 
proposed form duplicates other periodic reports, such as that on Form 
U5S;160 because annual filings achieve the purpose of assuring 
compliance with the conditions of the rule;161 because competitors 
are not burdened with preparation of the form;162 because the 
benefits of quarterly reporting do not justify its costs;163 and 
because rule 58 companies should not be required to file more 
frequently than holding companies and service companies.164 Many 
of these commenters believe that annual filings are 
appropriate,165 although one favors semiannual reporting,166 
and another proposes that the bulk of the information be filed 
annually, with quarterly filings used to report any changes during the 
quarter.167 One commenter suggests that the form be clarified to 
indicate that filings are to be made quarterly rather than 
``continuously.'' 168 The Commission has concluded that the filing 
of complete and current financial statements and other information 
(particularly information on transactions between rule 58 companies and 
their affiliates) in each quarterly report will facilitate appropriate 
monitoring of acquisitions pursuant to the rule. The form, as adopted, 
thus requires quarterly reporting.
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    \159\ Comments of New Orleans.
    \160\ Comments of AGA and Columbia.
    \161\ Comments of Entergy.
    \162\ Comments of Allegheny.
    \163\ Comments of Southern.
    \164\ Id.
    \165\ Comments of Allegheny, AGA, Columbia, Consolidated, 
Entergy and Southern.
    \166\ Comments of Cinergy.
    \167\ Comments of AEP.
    \168\ Comments of CSW. The rule has been revised to clarify that 
the filing requirement is not continuous.
---------------------------------------------------------------------------

    Many commenters express concern with the type of reporting required 
by the proposed form, particularly the required financial statements. 
The commenters believe that this requirement is burdensome, and 
unnecessary, because registered systems file consolidating financial 
statements in their annual reports on Form U5S; 169 because 
separate financial information would be required even for a company in 
which only a minor investment is made; 170 because state 
regulators are interested in nonutility operations as a whole rather 
than separate components; 171 and because separate financial 
statements would be required for each subsidiary in cases where 
investments are structured through several tiers of 
subsidiaries.172 The Commission believes that the filing of 
financial information for each investment under rule 58 is appropriate 
to enable the Commission and the interested state commissions to 
monitor activity under the rule. The Commission is, however, modifying 
certain of the requirements in the form as proposed to deal with 
certain issues raised by commenters on the proposal.
---------------------------------------------------------------------------

    \169\ Comments of Columbia. Cinergy commented that financial 
statements should be filed with the form only upon the initial 
acquisition of securities of an energy-related or gas-related 
company; thereafter, the consolidating financial statements in Form 
U5S would provide sufficient updating information.
    \170\ Comments of Allegheny and Southern.
    \171\ Comments of Southern.
    \172\ Comments of Allegheny and Southern.
---------------------------------------------------------------------------

    The purpose of requiring financial statements is to provide 
information on each significant investment, not to compel holding 
companies to prepare financial statements for shell companies. As a 
result, the form, as adopted, permits consolidation of the financial 
statements of downstream subsidiaries with those of the first-tier 
energy-related or gas-related company,173 so long as the first-
tier subsidiary owns interests only in companies engaged in one 
permitted activity.
---------------------------------------------------------------------------

    \173\ As discussed previously, indirect investment in energy-
related and gas-related companies through intermediate subsidiaries 
is permitted under the rule as adopted.
---------------------------------------------------------------------------

    The Commission also recognizes that the filing of financial 
statements for companies in which the registered system holds only a 
small interest may be overly burdensome without offering a significant 
measure of protection for utility shareholders and consumers. 
Accordingly, the form, as adopted, requires the filing of financial 
statements only for companies in which the registered system has at 
least a 50% equity or other ownership interest. The form provides that, 
for all other rule 58 companies, the registered holding company will 
make available to the Commission such financial statements as are 
available to it.
    A number of commenters express concern that the form will result in 
disclosure of confidential financial and other commercially sensitive 
information that may damage the holding company's competitive 
position.174 The Commission agrees that confidentiality of certain 
business information is an important concern. As noted in the Proposing 
Release, however, the form does not require reporting of sensitive 
information such as identity of customers. Further, applicants may 
claim confidential treatment pursuant to rule 104 under the Act for 
some items of information. Thus, commercially sensitive information 
should have adequate protection.
---------------------------------------------------------------------------

    \174\ Comments of Allegheny, Columbia and Southern.
---------------------------------------------------------------------------

    Other changes in the final form include the following. The filing 
instructions have been revised to reflect electronic filing under the 
Commission's EDGAR system.175 Also, the report for the last period 
in the reporting company's fiscal year will be

[[Page 7915]]

due 90 days, rather than 60 days, after the end of the period.176 
Finally, the form has been clarified to require disclosure with respect 
to all energy-related and gas-related companies in which investments 
were made during the reporting period.177 Other specific comments 
were not adopted, including a suggestion that all items except 5(b) 
(relating to associate transactions) are unnecessary.178 In 
addition, the form has been revised to provide a format for reporting 
of the required information and to clarify generally the filing 
instructions.
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    \175\ Comments of Consolidated and Northeast.
    \176\ Comments of Northeast.
    \177\ Comments of Cinergy.
    \178\ Comments of Allegheny. While the reporting of associate 
transactions is a primary purpose of the form, it is also intended 
to solicit information through which the staff of the Commission and 
interested state commissions can monitor compliance with the 
limitations of the rule, including limitations on the type of 
activities in which the company in question is engaged.
---------------------------------------------------------------------------

    Commenters believe that no other new reporting requirements are 
needed to assure that rule 58 companies derive substantially all of 
their revenues from permitted activities.179 The Commission has 
concluded that Form U-9C-3, together with other existing reporting 
requirements, provides sufficient information for this purpose, and 
that no additional new requirements are needed.
---------------------------------------------------------------------------

    \179\ Comments of AGA (information in Form U5S is adequate for 
this purpose); CSW (existing proposed reporting requirements could 
be reduced and still provide this assurance); Consolidated (if 
further assurance is needed, a statement of compliance could be 
included in the Form U5S) and Entergy and Northeast (Form U-9C-3 
provides sufficient information to put regulators on notice of other 
activities).
---------------------------------------------------------------------------

VI. Conclusion

    The Commission believes that registered holding company systems 
should be relieved of the regulatory burden of having to file multiple 
applications for authority to engage, through acquisitions of 
securities, in nonutility activities that are closely related to 
utility operations and that are of the same character or type as those 
the Commission has allowed in previous cases. Rule 58 is intended to 
permit investments in energy-related companies and gas-related 
companies, as defined, without geographic limits based on the 
registered system's service territory or other restrictions similar to 
those incorporated in some previous orders. The Commission believes 
that the limitation of the rule on the aggregate amount that a 
registered holding company system may invest, directly or indirectly, 
in energy-related companies should help to assure that the public 
interest and the interest of investors and consumers will not be 
adversely affected by acquisitions made pursuant to the rule. In 
addition, the reporting requirements should enable the Commission and 
interested state and local regulators to monitor financial and other 
effects of such transactions.

Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
Chairman of the Commission has certified as follows:

    I, Arthur Levitt, Chairman of the Securities and Exchange 
Commission, hereby certify pursuant to 5 U.S.C. 605(b) that proposed 
rule 58 and proposed amendments to rules 45 and 52 under the Public 
Utility Holding Company Act of 1935, as amended (15 U.S.C. 79 et 
seq.), together concerning the acquisition by a registered holding 
company and its subsidiaries of securities of certain nonutility 
companies, without a filing requirement, will not have a significant 
impact on a substantial number of small businesses. The reason for 
this certification is that it does not appear that any small 
businesses would be affected by the proposed rule and rule 
amendments.

    Arthur Levitt, Chairman

    Dated: June 19, 1995.

    The Commission did not receive any comments with respect to the 
Chairman's certification.

Costs and Benefits

    Rule 58 will substantially decrease regulatory costs for the twelve 
(12) electric and three (3) gas registered holding companies. In 
calendar year 1995, 35 applications would not have been filed had the 
proposed rule 58 and related rule amendments been in place. Estimated 
savings per application would have been approximately $28,000, 
including related legal, accounting, and management costs. Thus, for 35 
applications filed in calendar year 1995, the aggregate savings would 
have been approximately $980,000 per year. Moreover, the reduction in 
Commission staff hours would have been approximately 3,800 hours 
(approximately 2 staff years). The only cost to the registered holding 
companies in complying with the rule will be the cost of completing and 
filing Form U-9C-3 on a quarterly basis. It is estimated that 
approximately 16 hours will be required to complete each form at an 
estimated cost of $100 per hour. Assuming 56 form submissions per year, 
the cost of compliance reporting would approximate $89,600 per year.

Paperwork Reduction Act

    The proposed rule and rule amendments are subject to the Paperwork 
Reduction Act of 1980 (44 U.S.C. 3501 et seq.) and have been submitted 
to the Office of Management and Budget for approval for use through 
September 30, 1998.

Statutory Authority

    The Commission is adopting rule 58 and amending rules 45 and 52 
pursuant to sections 6, 9, 12 and 20 of the Act.

List of Subjects in 17 CFR Parts 250 and 259

    Electric utilities, Holding companies, Natural gas, Reporting and 
recordkeeping requirements, Securities.

Text of Rules

    For the reasons set out in the preamble, chapter II, title 17, of 
the Code of Federal Regulations is amended as follows:

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

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

    Authority: 15 U.S.C. 79c, 79f(b), 79i(c)(3), 79t, unless 
otherwise noted.

    2. Section 250.45 is amended by revising paragraph (b)(4) to read 
as follows:


Sec. 250.45  Loans, extensions of credit, donations and capital 
contributions to associate companies.

* * * * *
    (b) Exceptions. * * *
    (4) Capital contributions or open account advances, without 
interest, by a company to its subsidiary company; Provided, That 
capital contributions or open account advances to any energy-related 
company subsidiary, as defined in Sec. 250.58, shall not be exempt 
hereunder unless, after giving effect thereto, the aggregate investment 
by a registered holding company or any subsidiary thereof in such 
company and all other such energy-related company subsidiaries does not 
exceed the limitation in Sec. 250.58(a)(1).
* * * * *
    3. Section 250.52 is amended by revising paragraph (b) to read as 
follows:


Sec. 250.52  Exemption of issue and sale of certain securities.

* * * * *
    (b) Any subsidiary of a registered holding company which is not a 
holding company, a public-utility company, an investment company, or a 
fiscal or financing agency of a holding company, a public-utility 
company or an investment company shall be exempt from section 6(a) of 
the Act (15 U.S.C. 79f(a)) and rules thereunder with respect to the 
issue and sale of any

[[Page 7916]]

common stock, preferred stock, bond, note or other form of 
indebtedness, of which it is the issuer if:
    (1) The issue and sale of such security are solely for the purpose 
of financing the existing business of such subsidiary company; and
    (2) The interest rates and maturity dates of any debt security 
issued to an associate company are designed to parallel the effective 
cost of capital of that associate company; Provided, That any security 
issued to an associate company by any energy-related company 
subsidiary, as defined in Sec. 250.58, shall not be exempt hereunder 
unless, after giving effect thereto, the aggregate investment by a 
registered holding company or any subsidiary thereof in such subsidiary 
and all other such energy-related company subsidiaries does not exceed 
the limitation in Sec. 250.58(a)(1).
* * * * *
    4. Section 250.58 is added to read as follows:


Sec. 250.58  Exemption of investments in certain nonutility companies.

    (a) Exemption from Section 9(a). Section 9(a) of the Act (15 U.S.C. 
79i(a)) shall not apply to:
    (1) The acquisition by a registered holding company, or a 
subsidiary company thereof, of the securities of an energy-related 
company; Provided, That, after giving effect to any such acquisition, 
the aggregate investment by such registered holding company and 
subsidiaries in all such companies does not exceed the greater of:
    (i) $50 million; or
    (ii) 15% of the consolidated capitalization of such registered 
holding company, as reported in the registered holding company's most 
recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q 
(Sec. 249.308a or Sec. 249.310 of this chapter) filed under the 
Securities Exchange Act of 1934, as amended (15 U.S.C. 78 et seq.); or
    (2) The acquisition by a holding company that is registered solely 
by reason of ownership of voting securities of gas utility companies, 
or a subsidiary company thereof, of the securities of a gas-related 
company.
    (b) Definitions. For purpose of this section:
    (1) The term energy-related company shall mean any company that, 
directly or indirectly through one or more affiliates, derives or will 
derive substantially all of its revenues (exclusive of revenues from 
temporary investments) from one or more of the following activities 
within the United States:
    (i) The rendering of energy management services and demand-side 
management services;
    (ii) The development and commercialization of electrotechnologies 
related to energy conservation, storage and conversion, energy 
efficiency, waste treatment, greenhouse gas reduction, and similar 
innovations;
    (iii) The ownership, operation, sale, installation and servicing of 
refueling, recharging and conversion equipment and facilities relating 
to electric and compressed natural gas powered vehicles;
    (iv) The sale of electric and gas appliances; equipment to promote 
new technologies, or new applications for existing technologies, that 
use gas or electricity; and equipment that enables the use of gas or 
electricity as an alternate fuel; and the installation and servicing 
thereof;
    (v) The brokering and marketing of energy commodities, including 
but not limited to electricity, natural or manufactured gas and other 
combustible fuels;
    (vi) The production, conversion, sale and distribution of thermal 
energy products, such as process steam, heat, hot water, chilled water, 
air conditioning, compressed air and similar products; alternative 
fuels; and renewable energy resources; and the servicing of thermal 
energy facilities;
    (vii) The sale of technical, operational, management, and other 
similar kinds of services and expertise, developed in the course of 
utility operations in such areas as power plant and transmission system 
engineering, development, design and rehabilitation; construction; 
maintenance and operation; fuel procurement, delivery and management; 
and environmental licensing, testing and remediation;
    (viii) The development, ownership or operation of ``qualifying 
facilities,'' as defined under the Public Utility Regulatory Policies 
Act of 1978, as amended (``PURPA''), and any integrated thermal, steam 
host, or other necessary facility constructed, developed or acquired 
primarily to enable the qualifying facility to satisfy the useful 
thermal output requirements under PURPA;
    (ix) The ownership, operation and servicing of fuel procurement, 
transportation, handling and storage facilities, scrubbers, and 
resource recovery and waste water treatment facilities; and
    (x) The development and commercialization of technologies or 
processes that utilize coal waste by-products as an integral component 
of such technology or process; Provided, That any company engaged in 
the activities specified in paragraphs (b)(1)(ii), (b)(1)(iii) with 
respect to electric powered vehicles, (b)(1)(vi), (b)(1)(ix) or 
(b)(1)(x) of this section, shall be an ``energy-related company'' for 
purposes of this section only if the securities of such company are 
acquired, directly or indirectly, by a registered holding company whose 
public-utility company subsidiaries are primarily electric utility 
companies; and Provided further, That any company engaged in the 
activities specified in paragraph (b)(1)(iii) of this section with 
respect to compressed natural gas powered vehicles, shall be an 
``energy-related company'' for purposes of this section only if the 
securities of such company are acquired, directly or indirectly, by a 
registered holding company whose public-utility company subsidiaries 
are primarily gas utility companies.
    (2) The term gas-related company shall mean any company that, 
directly or indirectly through one or more affiliates, derives or will 
derive substantially all of its revenues (exclusive of revenues from 
temporary investments) from one or more of the following activities 
within the United States:
    (i) Activities permitted under section 2(a) of the Gas-Related 
Activities Act of 1990, 104 Stat. 2810; and
    (ii) Activities specified in section 2(b) of the Gas-Related 
Activities Act and approved by order of the Commission under sections 9 
and 10 of the Act (15 U.S.C. 79i-j).
    (3) The term aggregate investment shall mean all amounts invested 
or committed to be invested in energy-related companies, for which 
there is recourse, directly or indirectly, to the registered holding 
company or any subsidiary company thereof.
    (c) Report on related business activities. For each quarter of the 
fiscal year of the registered holding company in which any acquisition 
that is exempt under this section is made, and for each such quarter 
thereafter in which the acquired interest is held, the registered 
holding company shall file with this Commission and with each state 
commission having jurisdiction over the retail rates of the public-
utility subsidiary companies of such registered holding company a 
Quarterly Report on Form U-9C-3 (Sec. 259.208 of this chapter). Such 
filing shall be made within 60 days following the end of the first 
three quarters of the fiscal year, and within 90 days after the end of 
the fourth quarter.

[[Page 7917]]

PART 259--FORMS PRESCRIBED UNDER THE PUBLIC UTILITY HOLDING COMPANY 
ACT OF 1935

    5. The authority citation for part 259 continues to read as 
follows:

    Authority: 15 U.S.C. 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q and 
79t.

    6. Section 259.208 and Form U-9C-3 are added to read as follows:


Sec. 259.208  Form U-9C-3, for notification of acquisition of 
securities exempt from section 9(a) pursuant to rule 58 (Sec. 250.58 of 
this chapter).

    This form shall be filed pursuant to Sec. 250.58(c) as the 
certificate of notification of an acquisition of securities exempted 
from the application of section 9(a) of the Act (15 U.S.C. 79a et seq.) 
pursuant to Sec. 250.58.

    [Editorial Note: The text of Form U-9C-3 appears in the appendix 
to this document and will not appear in the Code of Federal 
Regulations.]

    Dated: February 14, 1997.
    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

Appendix

Note: This form will not appear in the Code of Federal Regulations.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM U-9C-3

QUARTERLY REPORT PURSUANT TO RULE 58

----------------------------------------------------------------------
(Name of registered holding company)
----------------------------------------------------------------------
(Address of principal executive offices)

GENERAL INSTRUCTIONS

A. Use of Form

    1. A reporting company, as defined herein, shall file a report 
on this form within 60 days after the end of each of the first three 
quarters, and within 90 days after the end of the fourth quarter, of 
the fiscal year of the registered holding company. The period 
beginning on the date of effectiveness of rule 58 and ending at the 
end of the quarter following the quarter in which the rule becomes 
effective shall constitute the initial period for which any report 
shall be filed, if applicable.
    2. The requirement to provide specific information by means of 
this form supersedes and replaces any requirement by order of the 
Commission to provide identical information by means of periodic 
certificates under rule 24; but does not so supersede and replace 
any requirement by order to provide information by means of an 
annual report on Form U-13-60.
    3. Information with respect to reporting companies that is 
required by Form U-13-60 shall be provided exclusively on that form.
    4. Notwithstanding the specific requirements of this form, the 
Commission may informally request such further information as, in 
its opinion, may be necessary or appropriate.

B. Statements of Monetary Amounts and Deficits

    1. Amounts included in this form and in related financial 
statements may be expressed in whole dollars, thousands of dollars 
or hundred thousands of dollars.
    2. Deficits and other similar entries shall be indicated by 
either brackets or parentheses. An explanation should be provided by 
footnote.

C. Formal Requirements

    This form, including exhibits, shall be filed with the 
Commission electronically pursuant to Regulation S-T (17 CFR 232.10 
et seq.). A conformed copy of each such report shall be filed with 
each state commission having jurisdiction over the retail rates of a 
public-utility company that is an associate company of a reporting 
company. Each report shall provide the name and telephone number of 
the person to whom inquiries concerning the report should be 
directed.

D. Definitions

    As used in this form, the word ``reporting company'' means an 
energy-related company or gas-related company, as defined in rule 
58(b). All other words and terms have the same meaning as in the 
Public Utility Holding Company Act of 1935, as amended, and the 
rules and regulations thereunder.

ITEMS

ITEM 1--ORGANIZATION CHART

                                                                                                                                                        
                                      Energy or gas-related                                 State of         Percentage of voting                       
     Name of reporting company               company          Date of  organization       organization         securities held      Nature of  business 
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        

Instructions

    1. Complete Item 1 only for the first three calendar quarters of 
the fiscal year of the registered holding company.
    2. Under the caption ``Name of Reporting Company,'' list each 
energy-related and gas-related company and each system company that 
directly or indirectly holds securities thereof. Add the designation 
``(new)'' for each reporting company of which securities were 
acquired during the period, and the designation ``(*)'' for each 
inactive company.
    3. Under the caption ``Percentage of Voting Securities Held,'' 
state the aggregate percentage of the outstanding voting securities 
of the reporting company held directly or indirectly by the 
registered holding company at the end of the quarter.
    4. Provide a narrative description of each reporting company's 
activities during the reporting period.

ITEM 2--ISSUANCES AND RENEWALS OF SECURITIES AND CAPITAL CONTRIBUTIONS

                                                                                                                                                        
                                                                                                        Person to whom     Collateral     Consideration 
  Company  issuing  security        Type of      Principal amount      Issue or      Cost of  capital    security was      given with      received for 
                               security  issued    of  security         renewal                             issued          security      each security 
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        


[[Page 7918]]

Instruction

    With respect to a transaction with an associate company, report 
only the type and principal amount of securities involved.

                                                                                                                
                                                                                                                
                    Company contributing        Company receiving         Amount of capital                     
                           capital                   capital                contribution                        
                                                                                                                
                                                                                                                
                                                                                                                

ITEM 3--ASSOCIATE TRANSACTIONS

Part I--Transactions Performed by Reporting Companies on Behalf of 
Associate Companies

                                                                                                                                                        
   Reporting company rendering     Associate company  Types of  services     Direct  costs      Indirect  costs                          Total  amount  
            services              receiving services        rendered            charged             charged        Cost of  capital         billed      
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        

Part II--Transactions Performed by Associate Companies on Behalf of 
Reporting Companies

                                                                                                                                                        
   Reporting company rendering     Associate company  Types of  services     Direct  costs      Indirect  costs                          Total  amount  
            services              receiving services        rendered            charged             charged        Cost of  capital         billed      
                                                                                                                                                        
                                                                                                                                                        
                                                                                                                                                        

Instructions

    1. This item is used to report the performance during the 
quarter of contracts among reporting companies and their associate 
companies, including other reporting companies, for service, sales 
and construction. A copy of any such contract not filed previously 
should be provided as an exhibit pursuant to Item 6. B.
    2. Parts I and II concern transactions performed by reporting 
companies on behalf of associate companies, and transactions 
performed by associate companies on behalf of reporting companies, 
respectively.

ITEM 4--SUMMARY OF AGGREGATE INVESTMENT

Investments in energy-related companies:                                                                        
    Total consolidated capitalization as of            $xxx,xxx  ..............  Line 1.                        
     ____________.                                                                                              
    Total capitalization multiplied by 15%              xxx,xxx  ..............  Line 2.                        
     (line 1 multiplied by 0.15).                                                                               
    Greater of $50 million or line 2...........  ..............        $xxx,xxx  Line 3.                        
    Total current aggregate investment:                                                                         
    (categorized by major line of energy-                                                                       
     related business)                                                                                          
        Energy-related business category 1.....         xxx,xxx  ..............                                 
        Energy-related business category 2.....         xxx,xxx  ..............                                 
        Etc....................................         xxx,xxx  ..............                                 
                                                ----------------                                                
            Total current aggregate investment.  ..............         xxx,xxx  Line 4.                        
                                                                ----------------                                
    Difference between the greater of $50        ..............        $xxx,xxx  Line 5.                        
     million or 15% of capitalization and the                                                                   
     total aggregate investment of the                                                                          
     registered holding company system (line 3                                                                  
     less line 4).                                                                                              
Investments in gas-related companies:                                                                           
    Total current aggregate investment:                                                                         
    (categorized by major line of gas-related                                                                   
     business)                                                                                                  
        Gas-related business category..........         xxx,xxx  ..............                                 
        Gas-related business category 2........         xxx,xxx  ..............                                 
        Etc....................................         xxx,xxx  ..............  ...............................
                                                ----------------                                                
            Total current aggregate investment.                         xxx,xxx                                 
                                                                ----------------                                
                                                                                                                

ITEM 5--OTHER INVESTMENTS

                                                                                                                
     Major line of energy-related        Other investment in      Other investment in     Reason for difference 
               business                  last  U-9C-3 report      this  U-9C-3 report      in  other investment 
                                                                                                                
                                                                                                                
                                                                                                                

Instruction

    This item concerns investments in energy-related and gas-related 
companies that are excluded from the calculation of aggregate 
investment under rule 58.

ITEM 6--FINANCIAL STATEMENTS AND EXHIBITS

    List all financial statements and exhibits filed as a part of 
this report.

Instructions

A. Financial Statements

    1. Financial statements are required for reporting companies in 
which the registered holding company system has at least a 50% 
equity or other ownership interest. For all other rule 58 companies, 
the registered holding company shall make available to the 
Commission such financial statements as are available to it.
    2. For each reporting company, provide a balance sheet as of the 
end of the quarter and income statements for the three-month and 
year-to-date periods ending as of the end of the quarter, together 
with any notes thereto. Financial statements shall be provided only 
for the first three calendar quarters of the fiscal year of the 
registered holding company.

[[Page 7919]]

    3. If a reporting company and each of its subsidiaries engage 
exclusively in a single category of energy-related or gas-related 
activity, consolidated financial statements may be filed.
    4. Separate financial statements need not be filed for inactive 
companies or for companies engaged solely in the ownership of 
interests in energy-related or gas-related companies.

B. Exhibits

    1. Copies of contracts required to be provided by Item 3 shall 
be filed as exhibits.
    2. A certificate stating that a copy of the report for the 
previous quarter has been filed with interested state commissions 
shall be filed as an exhibit. The certificate shall provide the 
names and addresses of the state commissions.
SIGNATURE
[Registered Holding Company]

By:--------------------------------------------------------------------
    (Name)

----------------------------------------------------------------------
    (Title)

----------------------------------------------------------------------
    (Date)

[FR Doc. 97-4167 Filed 2-19-97; 8:45 am]
BILLING CODE 8010-01-P