[Federal Register Volume 63, Number 38 (Thursday, February 26, 1998)]
[Rules and Regulations]
[Pages 9736-9742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4855]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 250
[Release No. 35-26826, File No. S7-11-95]
RIN 3235-AG45
Exemption of Issuance and Sale of Securities by Public Utility
and Nonutility Subsidiary Companies of Registered Public Utility
Holding Companies; Rescission of Statements of Policy
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Commission is amending rule 52 under the Public Utility
Holding Company Act of 1935 (``Act'') to exempt from the requirement of
prior Commission approval under the Act the issue and sale of any
security by a subsidiary company in a registered holding company
system, where the conditions of the rule are otherwise met. The
Commission is also amending rule 45 under the Act to conform the
exemption from section 12(b) of the Act, which is provided by rule 45,
to the exemption from section 6(a), which is provided by rule 52. These
amendments are intended to eliminate unnecessary regulatory and
paperwork burdens associated with seeking Commission approval for
routine financings by companies in registered holding company systems.
EFFECTIVE DATE: February 26, 1998.
FOR FURTHER INFORMATION CONTACT: Catherine A. Fisher, Assistant
Director, or Martha Cathey Baker, Senior Special Counsel, at (202) 942-
0545, Office of Public Utility Regulation, Division of Investment
Management, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: Subject to stated terms and conditions, rule
52 (17 CFR 250.52) under the Act exempts from the requirement of prior
Commission approval under section 6(a) of the Act the issuance and sale
of certain specified types of securities by a subsidiary of a
registered holding company. Rule 52 also exempts from the requirement
of prior Commission authorization under section 9(a) of the Act the
acquisition by a company in a registered holding company system of the
securities issued by an associate company under the rule. The
Commission is amending rule 52 to exempt all types of securities issued
and sold by subsidiary companies, subject to the satisfaction of the
other conditions of the rule. Additionally, the Commission is adopting
a conforming change to rule 45 to exempt from the requirement of prior
Commission approval under section 12(b) any guaranty by a subsidiary
company of debt securities issued by any other subsidiary company, so
long as the issuance of the guaranty and the underlying obligation are
exempt under rule 52. The Commission is also rescinding the statements
of policy with respect to first mortgage bonds and preferred stock
(``Statements of Policy'').1 The Commission proposed these
amendments and rescission of the Statements of Policy by release issued
on June 20, 1995.2
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\1\ The Statements of Policy were adopted by the Commission on
February 16, 1956 (Holding Co. Act Release Nos. 13105 and 13106) and
amended on May 8, 1969 and June 22, 1970 (Holding Co. Act Release
Nos. 16369 and 16758, respectively).
\2\ Holding Co. Act Release No. 26312 (June 20, 1995), 60 FR
33640 (June 28, 1995) (``Proposing Release'').
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Discussion
Rule 52 exempts from the requirement of prior Commission
authorization under section 6(a) the issue and sale of certain types of
securities by subsidiary companies of registered holding
companies.3 The rule also exempts from the requirement of
prior Commission authorization under section 9(a)(1) the acquisition by
a company in a registered system of any securities issued by an
associate company under the rule.4
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\3\ Section 6(a) requires Commission approval under the
standards of section 7 for the issue and sale of any security of a
registered holding company or its subsidiary company. Section 6(b)
authorizes the Commission to exempt from the requirements of section
6(a):
The issue or sale of any security by any subsidiary company of a
registered holding company, if the issue and sale of such security
are solely for the purpose of financing the business of such
subsidiary company and have been expressly authorized by the State
commission of the State in which such subsidiary company is
organized and doing business, or if the issue and sale of such
security are solely for the purpose of financing the business of
such subsidiary company when such subsidiary company 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.
Congress intended ``to exempt the issue of securities by
subsidiary companies in cases where holding company abuses are
unlikely to exist.'' H.R. Conf. Rep. No. 1903, 74th Cong., 1st Sess.
66-67 (1935). See generally Holding Co. Act Release No. 25058 (Mar.
19, 1990), 55 FR 11362 (Mar. 28, 1990) (adopting rule 52); Holding
Co. Act Release No. 25573 (July 7, 1992), 57 FR 31120 (July 14,
1992) (amending rule 52); and Holding Co. Act Release No. 26311
(June 20, 1995), 60 FR 33634 (June 28, 1995) (further amending rule
52).
\4\ Section 9(a)(1) in pertinent part requires prior Commission
approval under the standards of section 10 of the Act for an
acquisition of securities by a registered holding company or its
subsidiary company. Section 9(c)(3) provides a limited exception
from this requirement 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 exemption under rule 52 does not apply to the issuance of
securities to form a new subsidiary of a registered holding company.
See rule 52(d).
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[[Page 9737]]
At present, the rule provides a conditional exemption from the
requirement of prior Commission approval only with respect to the issue
and sale by public utility and certain nonutility subsidiaries of a
registered holding company of any common stock, preferred stock, bond,
note or other form of indebtedness. The issue and sale of the
securities must be solely for the purpose of financing the business of
the issuing subsidiary and, if the issuer is a public utility
subsidiary, must be expressly authorized by the relevant state
commission. If the issuing subsidiary is an ``energy-related company''
as defined in rule 58 under the Act, it is subject to additional
limitations on the amount of securities it may issue to associate
companies without Commission approval.5 Additionally, the
interest rate and maturity date of any debt security issued to an
associate company must be designed to parallel the effective cost of
capital of that associate company. By its terms, rule 52 currently
excludes ``any guaranty and other form of assumption of liability on
the obligations of another'' from the exemption provided by the rule.
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\5\ Rule 58, 17 CFR 150.58(a)(1), was proposed concurrently with
the proposed amendments to rule 52 and rule 45 that are adopted
today. Rule 58 provides that the acquisition by a company in a
registered holding company system of securities of an energy-related
company, as defined in the rule, does not require prior approval of
the Commission, subject to certain conditions and subject to an
aggregate investment limitation of the greater of $50 million or 15%
of the consolidated capitalization of the registered holding
company. When rule 58 was adopted, rules 52 and 45 were amended to
conform the exemption for intrasystem financing by nonutility
energy-related companies afforded by those rules to the investment
limitations in rule 58. See Holding Co. Act Release No. 26667 (Feb.
14, 1997), 62 FR 7900 (Feb. 20, 1997) (``Rule 58 Release'').
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Rule 45 prohibits registered holding companies and their
subsidiaries from extending credit to or indemnifying a company in the
same holding company system, without filing a declaration and obtaining
a Commission order.6 Rule 45(b) provides limited exceptions
from the general provision.
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\6\ Rule 45 was adopted under section 12(b), which provides
that:
It shall be unlawful for any registered holding company or
subsidiary company thereof, by use of the mails or any means or
instrumentality of interstate commerce, or otherwise, directly or
indirectly, to lend or in any manner extend its credit to or
indemnify any company in the same holding-company system in
contravention of such rules and regulations or orders as the
Commission deems necessary or appropriate in the public interest or
for the protection of investors or consumers or to prevent the
circumvention of the provisions of this title or the rules,
regulations, or orders thereunder.
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In the Proposing Release, the Commission proposed amendments that
would (a) expand the exemption provided by rule 52 to cover all types
of securities that may be issued by registered holding company
subsidiaries, including guaranties; and (b) conform rule 45 to the
proposed amendments to rule 52 so as conditionally to exempt from the
requirement of prior Commission approval under section 12(b) any
guaranty by a subsidiary company of securities issued by any other
subsidiary company. The Commission also requested comment on the
following issues: (a) Whether interest rate swap agreements and related
instruments should be covered by rule 52; (b) whether compliance with
rule 52(b)(2) 7 should be required where a nonutility
subsidiary of a registered holding company issues a security to an
associate nonutility company; (c) whether exemption of nonutility
financing should be subject to other limitations based on, for example,
capitalization ratios, financial condition, or past losses incurred in
connection with nonutility ventures; (d) whether notice of financing
transactions by nonutility companies should be required to be submitted
to interested state commissions; and (e) whether the Statements of
Policy should be rescinded.
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\7\ Rule 52(b)(2) requires that the interest rate and maturity
date of a debt security issued by a nonutility company to an
associate company be designed to parallel the effective cost of
capital of the associate company.
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The Commission received comments submitted by seven registered
holding companies,8 Wisconsin Energy Corporation
(``WEC''),9 the American Gas Association (``AGA'' and,
together with the registered holding companies and WEC, ``Industry
Commenters''), and the Council of the City of New Orleans (``New
Orleans''). The Industry Commenters generally support adoption of the
proposed amendments, which they state would: (a) Reduce unnecessary
delays and burdensome administrative costs; 10 (b) provide
necessary flexibility to respond to rapidly changing market
opportunities and unforeseen events; 11 and (c) improve
registered holding companies' competitive position relative to non-
registered holding companies.12
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\8\ The registered holding companies submitting comments were
American Electric Power Company, Inc. (``AEP''), Allegheny Power
System, Inc. (``Allegheny''), Consolidated Natural Gas Company
(``Consolidated''), The Columbia Gas System, Inc. (now Columbia
Energy Group) (``Columbia''), General Public Utilities Corporation
(now GPU, Inc.) (``GPU''), Northeast Utilities (``Northeast'') and
The Southern Company (``Southern'').
\9\ WEC is an exempt holding company under section 3(a)(1) of
the Act.
\10\ Comments of Allegheny, AGA, AEP, Columbia and Southern.
\11\ Comments of AEP, AGA, GPU, Northeast and WEC.
\12\ Comments of AEP, AGA, GPU, Northeast and WEC.
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New Orleans opposes adoption of the proposed amendments. New
Orleans states that the proposed amendments would permit system
companies to proceed ``in an unregulated environment,'' since ``state
commissions may have limits on their authority to act.'' 13
New Orleans further states that the amendments, together with then-
proposed rule 58, are ``unlawful,'' and goes on to state that the
amendments ``do not possess the strong factual basis necessary to
support the conclusion that no abuses will occur if [they] are
implemented.'' 14 New Orleans asks that the Commission
either abandon the proposed amendments, reissue them for further
comments, or modify them to reflect the Congressional intent that the
Commission be responsible for the protection of consumers through
review of registered holding company system financings.
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\13\ Comments of New Orleans.
\14\ Id.
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A discussion follows of the principal features of the proposed
amendments, the specific issues on which the Commission requested
comment in the Proposing Release, and other issues raised by
commenters.
1. Expansion of Types of Securities Exempt Under Rule 52
As originally adopted, rule 52 exempted the issue and sale of
common stock, preferred stock, first mortgage bonds, and general and
refunding mortgage bonds by public utility subsidiaries of registered
holding companies, subject to various conditions.15 In 1992,
the rule was amended to cover all types of mortgage bonds and
notes.16 Further amendments to rule 52 in 1995 (``1995
Amendments'') 17 broadened the types of securities that may
be issued by public utility subsidiaries to include all
[[Page 9738]]
debt securities 18 and expanded the exemption to allow
nonutility subsidiaries to issue the securities under the rule. In the
Proposing Release, the Commission requested comment on further
expansion of rule 52 to include within its exemption all types of
securities issued by subsidiaries of registered holding companies,
subject to satisfaction of the other conditions of the rule.
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\15\ Holding Co. Act Release No. 25058 (Mar. 19, 1990), 55 FR
11362 (Mar. 28, 1990).
\16\ Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR
31120 (July 14, 1992).
\17\ Holding Co. Act Release No. 26311 (June 20, 1995), 60 FR
33634 (June 28, 1995).
\18\ The 1995 Amendments specifically excluded guaranties from
the scope of rule 52, and the issue of whether guaranties should be
exempt was reproposed for consideration and comment in the broader
context of extending the rule to cover all securities. The subject
of guaranties is discussed below.
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The Industry Commenters support expanding the types of securities
covered by the exemption, because the expansion gives companies in
registered holding company systems the flexibility to raise capital at
the lowest possible cost, regardless of the form of security being
issued, just as their competitors do.19 In addition to its
more general objections to the proposed amendments, New Orleans is
concerned that the amendments will ``facilitate more complex forms of
financings of nonutility businesses,'' without any state or federal
review of the attendant risks.
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\19\ See, e.g., comments of Consolidated, GPU and WEC.
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In adopting the 1995 Amendments and expanding the exemption under
rule 52 to all debt securities, the Commission noted that rule 52, in
its then-current form, was of limited use.20 The Commission
stated that permitting utility subsidiaries to issue all types of debt
securities under the rule was ``appropriate in view of the continuing
requirement of express approval by the [relevant] state commission * *
*.'' 21 With respect to the issuance by nonutility
subsidiaries of securities, the Commission stated that requiring prior
Commission approval was ``no longer necessary'' in view of the
extensive reporting requirements required by the Act and other federal
securities laws and the level of scrutiny applied to issuances by
investors and the financial community.22
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\20\ 60 FR at 33635. For example, the issuance by public utility
subsidiary of a registered holding company of a debt instrument
other than a mortgage bond or note required prior Commission
approval, whether or not such issuance had been explicitly approved
by a state commission.
\21\ 60 FR at 33635.
\22\ 60 FR at 33636.
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For similar reasons, the Commission believes it is appropriate to
expand the exemption provided by rule 52 to include all types of
securities.23 In the case of public utility subsidiaries,
the exemption will continue to be available only if the appropriate
state commission has expressly approved the issue and sale and, in this
case, any further review by the Commission would only duplicate efforts
and unnecessarily delay financing activities. In the case of both
public utility and other subsidiaries, the exemption will be available
only if the proceeds are used in connection with an existing business.
Thus, absent another available exemption, the Commission will continue
to review any financing the proceeds of which are used to enter into a
new business endeavor, to determine if the standards of the Act have
been satisfied. In addition, the Commission will retain jurisdiction
over the financing activities of the registered holding company,
including any guaranty of obligations of its subsidiaries.
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\23\ As amended, rule 52 will exempt the issue of guaranties and
certain interest rate swap agreements (see the separate discussions
of guaranties and derivative instruments below). GPU specifically
suggests that partnership and other similar types of interests are a
common vehicle for nonutility subsidiary financing and should be
exempt under the rule. The Commission's view is that such interests
are similar to the types of instruments covered by the definition of
a security in section 2(a)(16) of the Act and therefore should be
included in the coverage of the rule.
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2. Guaranties
Rule 52, in its current form, does not extend to guaranties. The
Commission sought comment in 1992 on whether guaranties should be
afforded an exemption under the rule, but declined to modify the rule
in this respect in the 1995 Amendments.24 The Proposing
Release again requested comment on whether guaranties should be
afforded an exemption under the rule.
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\24\ 60 FR at 33635, n.10.
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A guaranty of debt securities issued by another subsidiary company
is itself a security under the Act,25 the issuance and sale
of which are subject to the declaration requirement of section 6(a),
unless exempted under section 6(b). In addition, the guaranty by a
subsidiary company of any obligation of another subsidiary company is
subject to section 12(b) and rule 45(a).26 An agreement to
assume joint liability, as co-maker or otherwise, with respect to the
indebtedness of another company is the functional equivalent of a
guaranty, and is also subject to both sections 6(a) and 12(b).
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\25\ Section 2(a)(16) of the Act (definition of security).
\26\ Section 12(a) of the Act prohibits the guaranty by
subsidiary companies of debt issued by a registered holding company.
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The Industry Commenters support the proposal to include guaranties
and other assumptions of liability in rule 52's exemption.27
New Orleans opposes extending the exemption in this respect, stating
that the proposed rule changes ``will make it difficult to determine
the level of corporate financial exposure and the degree of risk
associated with nonutility ventures.'' 28 As New Orleans
itself notes, however, the rule would preclude utility subsidiaries
from assuming liability without state commission
authorization.29 Also, as AEP notes, the risks of nonutility
subsidiary activities are imposed on utility associates through the
holding company, and the Commission retains its jurisdiction over the
exposure of the holding company to these activities.30
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\27\ Comments of Allegheny, Northeast and WEC.
\28\ Comments of New Orleans.
\29\ Id.
\30\ Comments of AEP.
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The reasons stated above for extending rule 52 to all types of
securities apply equally to extending the rule's coverage to
guaranties. Under the conditions provided in rule 52, the Commission
believes it appropriate to exempt guaranties and other assumptions of
liabilities from the prior approval requirements of section 6(a).
Rule 45(a), with exceptions not relevant here, also prohibits the
issuance of guaranties and similar undertakings by a subsidiary company
without the filing of a declaration.31 A guaranty may be
both a security under section 6(a) and an extension of credit under
section 12(b). The Commission's view is that any guaranty or similar
undertaking should be exempt under rule 45, if the guaranty is itself
exempt under rule 52 and it is issued with respect to the security of
another subsidiary company that is likewise exempt under rule 52.
Otherwise, rule 52 would not effectively exempt the issuance of the
guaranty from the requirement of prior Commission approval.
Accordingly, the Commission is adopting the proposed amendment to rule
45(b), in substantially the form proposed,32 to conform the
related exemptions.
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\31\ At present, rule 45(b)(6) exempts certain guaranties ``in
the ordinary course of business.'' The rule by its terms does not
apply to a guaranty of a subsidiary's indebtedness for borrowed
money.
\32\ Minor revisions have been made in the rule as adopted, to
clarify that the assumption of liability must be exempt under rule
52 in order for it to be exempt under rule 45(b)(7).
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3. Interest Rate Swaps and Similar Arrangements
In the Proposing Release, the Commission noted that it has
exercised jurisdiction under sections 6(a) and 7 of the Act over
interest rate swap
[[Page 9739]]
agreements 33 and related instruments,34 and
requested comment on the extent, if any, to which these transactions
should be exempt from prior Commission approval under rule 52. All
commenters that addressed this issue support exempting swaps under rule
52.35 Also, Northeast requested that the Commission clarify
the basis of its jurisdiction over these transactions and Southern
requested that registered holding companies ``be given a fuller
opportunity to address the legal basis'' on which jurisdiction rests.
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\33\ See, e.g., South West Electric Power Co., Holding Co. Act
Release No. 25755 (March 5, 1993); Consolidated Natural Gas Co.,
Holding Co. Act Release No. 25651 (Oct. 8, 1992); General Public
Utilities Corp., Holding Co. Act Release No. 25625 (Sept. 10, 1992);
New England Power Co., Holding Co. Act Release No. 25592 (July 30,
1992); New England Energy Inc., Holding Co. Act Release No. 25378
(Sept. 19, 1991); Northeast Utilities, Holding Co. Act Release No.
25221 (Dec. 21, 1990); and Georgia Power Co., Holding Co. Act
Release No. 25197 (Nov. 30, 1990).
\34\ These related instruments include products referred to as
interest rate caps, floors and collars.
\35\ Comments of AGA, Columbia, GPU, Northeast and Southern.
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The types of derivative transactions over which the Commission has
taken jurisdiction under sections 6(a) and 7 of the Act are swaps that
are tied to the interest or dividend rate on a bond, share of preferred
stock, or other security issued by a company in a registered holding
company system. These types of derivative transactions are typically
entered into as a means of reducing the company's capital costs, by
trading the interest or dividend rate on an outstanding security for an
interest or dividend rate based on current or expected market changes.
In entering into the swap transaction, the company accomplishes the
same result as it would by issuing a new security bearing the current
interest or dividend rate and using the proceeds to refund the
outstanding one, without incurring the accompanying issuance costs.
In these limited circumstances, entry into a derivative transaction
is the functional equivalent of issuing a new security. As a result, it
is consistent with the underlying principles of the Act and the
provisions of section 6(b) to exempt these limited types of swaps from
the requirement of prior Commission review.36 Provided that
the other conditions of the rule are satisfied,37 the types
of derivative transactions entered into by registered system companies
to manage the capital costs associated with their own obligations will
be afforded the exemption of rule 52.
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\36\ Alternatively, this type of derivative transaction can be
viewed as a change in the terms of an existing security.
\37\ In the case of public utility subsidiaries of registered
holding companies, state commission approval of entry into the
derivative will be required in order to qualify for exemption under
rule 52(a).
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Entry by a company in a registered holding company system into
derivative transactions not related to outstanding obligations of the
company are not intended to be exempted by rule 52. Further, the fact
that the limited types of derivative transactions described above are
afforded the exemption of the rule is not intended to indicate any
position on the issue of whether swaps and other types of derivative
instruments would be deemed to be securities for other purposes under
the Act, or under the other federal securities laws.38
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\38\ In general, whether a derivative instrument will be
determined to be a security under the federal securities laws
depends on a number of factors, including the terms of the
instrument and the manner in which it is marketed and sold. See In
re BT Securities Corp., Securities Exchange Act Release No. 35136
(Dec. 22, 1994).
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4. Additional Conditions to Exemption
In the Proposing Release, the Commission noted concerns that public
utility subsidiaries of registered holding companies and their
customers may need protection from the financial effects of financing
transactions, particularly in connection with nonutility financing that
is not subject to state oversight. Comment was sought on whether
additional conditions to exemption should be imposed, in the form of
limitations based on capitalization ratios, financial condition, past
losses in connection with nonutility ventures, or any other
basis.39
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\39\ 60 FR at 33641.
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The Industry Commenters uniformly state that no additional
conditions are needed.40 However, New Orleans states that,
if the proposed amendments to rules 52 and 45 are not rejected,
additional conditions are necessary to facilitate an accurate
determination of the capital structure of public utility subsidiaries
and, in turn, the cost of capital of those subsidiaries. Specifically,
New Orleans asks the Commission (a) to assure that both the FERC and
state commissions have access to the books and records of all
registered holding company affiliates and audit authority sufficient to
preclude cross-subsidization; and (b) to establish cost allocation
rules.41 Additionally, New Orleans requests that these
conditions should include an ``affirmative evaluation of the effects of
additional affiliate investments on a utility's cost of capital,
capital structure, cost of debt, and debt ratings.'' 42
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\40\ See, e.g., comments of AEP, AGA, Allegheny, Columbia,
Consolidated, GPU, Northeast and Southern. These commenters, in
support of this view, cite protections provided by: continuing
Commission review of holding company financings; state commission
review of utility financings; powers of the Federal Energy
Regulatory Commission (``FERC'') and state commissions to protect
ratepayers in the context of ratemaking; safeguards inherent in the
financial markets, including those provided by ratings agencies and
securities exchanges; protection of investors through the other
securities laws; the routine nature of the transactions that would
be exempted; and the limitation on intrasystem ``energy-related''
subsidiary financings in rule 58.
\41\ Comments of New Orleans.
\42\ Id.
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With respect to the suggestions of New Orleans concerning access to
information, the Commission notes that it maintains an ongoing effort
to assure that the FERC and relevant state commissions are afforded the
opportunity to review relevant information provided to the Commission
on various transactions subject to its jurisdiction. Also, as discussed
below, the Commission is adopting a requirement that registered holding
companies provide notice of certain nonutility financings to state
commissions having jurisdiction over the rates charged by the utility
associates of the subsidiaries.43
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\43\ In addition, as provided in the Rule 58 Release, each
registered holding company is required to provide on Form U-9C-3
extensive financial information to the Commission on investments in
nonutility ventures that are exempted from prior Commission approval
under rule 58. A copy of that information is required to be filed
with each state commission having jurisdiction over the rates
charged by the public utility subsidiaries of the registered holding
company in question.
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Regarding the request by New Orleans for cost allocation rules, the
Commission notes that the exemption afforded by rule 52 with respect to
intrasystem financings is conditioned on the use of terms that parallel
the effective cost of capital of the associate company lender. This
provision should serve to avoid any material cross-subsidization of
nonutility companies at the expense of public utility subsidiaries and
their ratepayers.
The Commission appreciates the need of state commissions to
evaluate the effects of investments by a registered holding company in
nonutility associates on the cost of capital of a jurisdictional
utility associate. However, the Commission believes that the reporting
requirements of rule 52, as currently in effect and as amended today,
will assist state commissions in guarding against improper increases in
the cost of capital as a result of any nonutility financing
transactions that directly affect their utility constituents. The
Commission agrees with the arguments advanced by the Industry
[[Page 9740]]
Commenters in this regard, and concludes that it is unnecessary to
impose additional conditions on the use of the exemption as proposed.
5. Need for ``Mirror Image'' Requirement in Nonutility Financing
Transactions
In the Proposing Release, the Commission requested comment on the
question of whether compliance with rule 52(b)(2) 44 should
be required in situations where a nonutility subsidiary of a registered
holding company issues a security that is acquired by another
nonutility subsidiary in the same holding company system. All Industry
Commenters addressing this issue support an exception from the ``mirror
image'' requirement of subsection (b)(2) for this type of transaction,
taking the position that financings solely between nonutility
associates of a registered holding company pose no risk of cross-
subsidization or other issues of protection of ratepayers.45
The Commission agrees that, absent a guaranty or other involvement by
the holding company or its public utility subsidiaries, the costs of
these transactions are unlikely to have a direct effect on ratepayers.
There is some concern, however, that public utility subsidiaries that
have transactional relationships with these nonutility associates may
be burdened with financing costs indirectly, and thus adversely
affected by the terms of the transactions.46 Accordingly,
the Commission has determined to defer action on the issue and study it
further.
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\44\ Rule 52(b)(2) requires that the interest rate and maturity
date of a debt security issued by a nonutility company to an
associate company be designed to parallel the effective cost of
capital of the associate company.
\45\ Comments of Consolidated, GPU, Southern and WEC.
\46\ See also comments of Consolidated (suggesting that consumer
interests may be implicated where the financing involves funds
``directly traceable back to the holding company financings'').
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6. Notice of Nonutility Financings to State Commissions
The Commission recognizes the need of state commissions, in
connection with carrying out their regulatory functions, for
information concerning financing transactions involving public utility
companies subject to their jurisdiction and other companies
(particularly nonutility companies) in the same holding company system.
As a result, the Commission also sought comment in the Proposing
Release on whether the rules should incorporate any requirements of
notice to interested state commissions of the consummation of financing
by nonutility subsidiaries of registered holding companies.
New Orleans supports additional disclosure of nonutility
financings, stating that information on associate company financing
would be appropriate ``to ascertain any at risk companies.'' All
Industry Commenters who responded on this issue oppose notifying state
commissions of nonutility financings. According to these parties,
notices would be unnecessary because state commissions (a) can protect
ratepayers through ratemaking proceedings and review of affiliate
transactions 47 and (b) already receive ``sufficient
information on the financial health of their jurisdictional
utilities.'' 48 Additionally, two of the Industry Commenters
assert that public disclosure could harm legitimate competitive and
commercial interests.49 These commenters recommend that, if
any disclosure is required, it be (a) limited to information on sales
of securities to affiliates and (b) provided on the Form U-9C-3 that is
required in connection with rule 58.50
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\47\ Comments of Consolidated and Columbia.
\48\ Comments of Columbia.
\49\ Comments of Allegheny and Southern.
\50\ See the Rule 58 Release. The Commission notes that there is
some duplication of information between Form U-6B-2 and Form U-9C-3
with respect to reporting financing transactions for energy-related
and gas-related companies. Form U-9C-3, however, includes only
information relating to these types of companies, not all nonutility
subsidiaries of registered holding companies. As a result, it is not
an appropriate mechanism for reporting many transactions that are
exempt under rule 52.
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The Commission has previously noted that the ability of state
commissions to obtain information about registered holding company
activities varies greatly from state to state.51 The need of
state commissions having retail rate jurisdiction over public utility
companies for information regarding financing activities of nonutility
associate companies of those utility companies, and their potential
inability to obtain this information, must be carefully considered.
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\51\ See The Regulation of Public-Utility Holding Companies,
Report of the Division of Investment Management, Securities and
Exchange Commission (June 1995) (``Report''), at 134-36.
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The Commission believes that delivery to interested state
commissions of only the financing information that will have a direct
bearing on their jurisdictional public utility companies should be
required. Rule 52, as amended today, includes a requirement that copies
of each Form U-6B-2 that is filed with the Commission to report an
issue of securities by a nonutility company, and the related
acquisition by an associate public utility company, must be submitted
to each state commission having jurisdiction over the retail rates of
the public utility company.52
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\52\ The information on financing transactions contained in Form
U-6B-2 is necessarily narrow and relates only to the financing
activities of nonutility associate companies. The Commission notes,
however, that extensive information on investments in nonutility
companies under rule 58 is required to be delivered to interested
state commissions. Also, information concerning registered holding
company investments in exempt wholesale generators and foreign
utility companies is required to be submitted to state commissions
pursuant to rule 53. The Commission believes that the aggregation of
this information should assist state commissions in the performance
of their regulatory duties, and directs the Commission staff to
coordinate with state commissions to assure that the information
provided to them is sufficient for this purpose.
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7. Statements of Policy
In the Proposing Release, the Commission noted that the Statements
of Policy, promulgated nearly forty years ago to specify the terms to
be included in new issues of first mortgage bonds and preferred stock,
have not kept pace with changes in the securities markets and hinder
the ability of registered companies to raise capital.53 The
proposal to rescind the Statements of Policy met with no opposition
from any of the parties submitting comments. For the reasons outlined
above and in the Proposing Release, the Commission is rescinding the
Statements of Policy.
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\53\ See Report at 51.
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8. Other Comments
Some Industry Commenters note that rule 42 requires prior
Commission approval for intrasystem redemption of securities,
notwithstanding that the issuance of these securities could be exempt
from prior Commission review under proposed rule 52.54 These
registered holding companies request that rule 42 be amended so that
security acquisitions, retirements and redemptions will be exempt from
review to the extent the issuance of those securities was exempt under
rule 52. While this type of transaction among associate companies
raises cross-subsidization issues, the suggestion regarding rule 42
warrants further consideration, particularly in connection with
transactions among nonutilities. The Commission anticipates addressing
this issue at a later date.
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\54\ Comments of Allegheny, Northeast, and Southern.
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Conclusion
The Commission has carefully reviewed the proposed amendments to
rules 52 and 45 in light of the comments received, and has concluded
that the proposed amendments are lawful. As amended, rule 52 retains
the
[[Page 9741]]
requirement that security issuances by utility subsidiaries (including
guaranties of obligations of associate companies) be explicitly
approved by the state commission having authority over the rates of
that utility.55 Further, the Commission will continue to
have jurisdiction to review entry into new nonutility businesses under
sections 9(a) and 10 and any related financing of these
businesses.56 In the course of the reviews, interested
parties may express their views on the impact of the investments on
consumers. As a further protection, both utility and nonutility
financing activities remain subject to the ongoing reporting and
auditing provisions of the Act. In light of these factors, and
considering the need for companies in registered holding company
systems to respond to market opportunities in a rapidly changing
competitive environment,57 the Commission finds that a case-
by-case review of the issuance of any type of security by subsidiaries
of registered holding companies is no longer necessary in the public
interest or for the protection of investors or consumers.
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\55\ Columbia requests that the Commission consider not
requiring express approval of a security issuance by the relevant
state commission where state law exempts the issuance from the need
for approval. As stated in the release adopting the 1995 Amendments,
it appears that section 6(b) does not offer a basis for this action.
60 FR at 33635.
\56\ Entry into many of these new businesses will require case-
by-case review and separate Commission authorization. As noted
above, however, the Commission recently adopted rule 58, which
exempts investment in some new business activities from the
requirement of prior Commission review. The Commission has
determined, as discussed in the Rule 58 Release, that the activities
covered by rule 58 are so closely related to the utility business,
that case-by-case review of these investments is no longer required
in order to find that the standards of the Act are met.
\57\ Noting that certain securities, such as partnership
interests, are ``commonplace in the financing of non-utility * * *
projects,'' GPU states that having the same ability as non-
registered holding company associates to engage in such financings
is ``crucial'' to the ability of registered holding company systems
to remain competitive. Comments of GPU.
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The Commission believes that subsidiaries of registered holding
companies should be able to engage in routine financings without the
regulatory burden of prior Commission authorization where possible
without jeopardizing the interests the Act is designed to protect. The
rule amendments adopted today are consistent with this objective.
These amended rules are not ``major rules'' within the meaning of 5
U.S.C. 801 et seq. They are substantive rules that grant an exemption
or relieve restrictions, within the meaning of 5 U.S.C. 553(d)(1), and
therefore may become effective immediately.
Regulatory Flexibility Act Certification
Under 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
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
sale of securities by a subsidiary of a registered holding company,
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 amendments.
Dated: June 19, 1995.
Arthur Levitt,
Chairman.
The Commission did not receive any comments with respect to the
Chairman's certification.
Costs and Benefits
Amended rule 52 will substantially decrease regulatory compliance
costs for the registered holding companies. There were 150 applications
filed in calendar year 1996 by companies in registered holding company
systems; in approximately 35 of these applications, specific requests
for financing authorization would not have been filed, had the proposed
amended rule 52 been in place. Estimated savings per application would
have been approximately $20,000 per application, and related legal,
accounting, and management costs. Thus, for 35 applications filed in
calendar year 1996, the aggregate savings would have been approximately
$700,000. Moreover, the reduction in Commission staff hours associated
with reviewing and analyzing these applications would have been
approximately 1,250 hours per year (approximately \1/2\ staff year).
The only cost to the registered holding companies in complying with the
amended rule will be the cost of completing a Form U-6B-2 after the
issue or sale of any security under the rule. It is estimated that
approximately one hour will be required to complete each form at an
estimated cost of $100 per hour. Assuming 35 financing applications per
year, the cost of compliance reporting would approximate $3,500 per
year.
Paperwork Reduction Act
These rules 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 to use them through September 30,
1998.
Statutory Authority
The Commission is amending rules 45 and 52 under sections 6, 9, 12
and 20 of the Public Utility Holding Company Act of 1935.
List of Subjects in 17 CFR Part 250
Electric utilities, Holding companies, Natural gas, Reporting and
recordkeeping requirements, Securities.
Text of Final Rules
For the reasons set forth in the preamble, part 250 of 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 adding paragraph (b)(7) to read as
follows:
Sec. 250.45 Loans, extensions of credit, donations and capital
contributions to associate companies.
* * * * *
(b) Exceptions. * * *
(7) An agreement by any subsidiary company of a registered holding
company to assume liability (as guarantor, co-maker, indemnitor, or
otherwise) with respect to any security issued by any other subsidiary
company in the same holding company system, provided that the issuance
and sale of such security is exempt, and such assumption of liability
constitutes the issuance of a security that is exempt, from the
declaration requirements of section 6(a) of the Act (15 U.S.C. 79f(a))
under Sec. 250.52.
* * * * *
3. Section 250.52 is amended by revising paragraphs (a) and (b),
and by adding paragraph (e), to read as follows:
Sec. 250.52 Exemption of issue and sale of certain securities.
(a) Any registered holding-company subsidiary which is itself a
public-utility 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 security, of which it is the issuer if:
[[Page 9742]]
(1) The issue and sale of the security are solely for the purpose
of financing the business of the public-utility subsidiary company;
(2) The issue and sale of the security have been expressly
authorized by the state commission of the state in which the subsidiary
company is organized and doing business; and
(3) 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.
(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 related rules with respect to the issue
and sale of any security of which it is the issuer if:
(1) The issue and sale of the security are solely for the purpose
of financing the existing business of the 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 under these
provisions unless, after giving effect to the issue of the security,
the aggregate investment by a registered holding company or its
subsidiary in the energy-related company subsidiary and all other
energy-related company subsidiaries does not exceed the limitation in
Sec. 250.58(a)(1).
* * * * *
(e) A copy of any Certificate of Notification on Form U-6B-2
(Sec. 259.206) that is filed with this Commission under this section
with respect to any security issued by a subsidiary of a registered
holding company under paragraph (b) of this section and acquired by a
public-utility company that is an associate company of the issuer,
shall be submitted concurrently to each state commission having
jurisdiction over the retail rates of the public-utility company.
Dated: February 20, 1998.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4855 Filed 2-25-98; 8:45 am]
BILLING CODE 8010-01-P