[Federal Register Volume 64, Number 244 (Tuesday, December 21, 1999)]
[Proposed Rules]
[Pages 71341-71346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32952]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 250

[Release No. 35-27110; International Series Release No. 1210; File No. 
S7-30-99]


Registered Public-Utility Holding Companies and 
Internationalization

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comments.

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SUMMARY: We are seeking comment on various issues surrounding the 
acquisition of United States utilities by foreign companies that will 
register as holding companies following the transaction.

DATES: Comments must be submitted on or before February 4, 2000.

ADDRESSES: Please send three copies of the comment letter to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All

[[Page 71342]]

comment letters should refer to File No. S7-30-99; include this file 
number on the subject line if E-mail is used. Anyone can read and copy 
the comment letters at our Public Reference Room, 450 Fifth Street, NW 
Washington, DC 20549. Electronically submitted comment letters also 
will be posted on our Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Catherine A. Fisher, Assistant 
Director, or Mark F. Vilardo, Senior Counsel, both at 202/942-0545.

SUPPLEMENTARY INFORMATION: Today we are requesting comment on issues 
arising under the Act with respect to foreign acquisitions of U.S. 
utilities.

Table of Contents

I.  Executive Summary and Introduction
II.  Background
III.  Acquisition of U.S. Utilities by Foreign Companies
    A.  The Legal Framework
    B.  Areas for Comment
    1.  General Policies of the Act
    2.  Section 11
    3.  Other Standards for Reviewing Acquisitions
    4.  Substantive Regulation of Foreign Holding Companies
    5.  Accounts and Records; Jurisdiction
    6.  Other Issues

I. Executive Summary and Introduction

    In 1992, Congress adopted the Energy Policy Act of 1992 [Pub. L. 
102-486, 106 Stat. 2776 (1992)] (``Energy Policy Act''). The 
legislation amended the Public Utility Holding Company Act of 1935 [15 
U.S.C. 79(a) et seq.] (``Holding Company Act'' or ``Act'') to create 
two new types of exempt entities, exempt wholesale generators 
(``EWGs'') and foreign utility companies (``FUCOs''). The legislation 
was intended to facilitate investments in foreign utilities by U.S. 
companies.
    Just as registered holding companies have pursued investment 
opportunities abroad, foreign companies are increasingly seeking to 
enter the utility business in the United States.1 Recently, 
two British companies engaged in the utility or energy business, 
Scottish Power plc (``ScottishPower'') and The National Grid Group plc 
(``National Grid''), have announced (and, in the case of ScottishPower, 
completed) plans to acquire U.S. utilities or public-utility holding 
companies.2 ScottishPower has registered under the Act and 
National Grid has announced its intention to do so. The acquisition of 
a U.S. utility or holding company by a foreign company and the 
acquiror's subsequent registration raise a number of interpretative and 
policy issues under the Act. We will need to address these issues when 
such transactions are presented to us for any necessary approvals or 
when the foreign companies register under the Act. We are, therefore, 
seeking comment from the public relating to these issues.
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    \1\ See infra note 5.
    \2\ On December 7, 1998, ScottishPower, an electric, gas and 
water utility based in the United Kingdom, announced its proposed 
acquisition of PacifiCorp, a electric utility operating in the 
western United States, in a share exchange valued at $12.8 billion, 
including assumed debt. See ScottishPower Offers $7.8 Billion for 
PacifiCorp, Megawatt Daily, Dec. 8, 1998, at 1. On December 14, 
1998, National Grid, an electric transmission utility, also based in 
the U.K., announced its proposed acquisition of New England Electric 
System (``NEES''), an electric utility operating in the northeast 
United States, for $3.2 billion in cash. See Laura Johannes, 
Electric Utility Set to Be Acquired by National Grid, Wall St. J., 
Dec. 14, 1998, at A2. In June 1999, the Federal Energy Regulatory 
Commission (``FERC'') approved each of these transactions. See 
Howard Buskirk, FERC Approves Foreign Buys of U.S. Utilities, The 
Energy Daily, Jun. 17, 1999, at 3. On November 30, 1999, 
ScottishPower announced that it had completed its acquisition of 
PacifiCorp. On December 1, 1999, ScottishPower filed with this 
Commission its Form U5A, notification of registration as a holding 
company under the Act. National Grid's application concerning its 
acquisition of NEES is pending at the Commission. See Holding Co. 
Act Release Nos. 27085 and 27086 (Oct. 8, 1999), 64 FR 56236 (Oct. 
18, 1999) and 64 FR 56372 (Oct. 19, 1999) (notices of the 
applications relating to the proposed acquisition of NEES by 
National Grid and National Grid's financing authorizations). 
ScottishPower concluded that, under section 9(a) of the Act, it did 
not require our approval to acquire PacifiCorp. See infra note 29 
for a discussion of the circumstances under which a utility 
acquisition requires our approval.
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II. Background

    Congress amended the Holding Company Act in 1992 in response to 
changes in the United States utility industry. As discussed in greater 
detail below, the Energy Policy Act created new categories of exempt 
entities and thereby provided greater flexibility for U.S. and foreign 
companies to acquire EWGs and for U.S. utilities to acquire both EWGs 
and FUCOs.3
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    \3\ The Energy Policy Act amended the Holding Company Act by, 
among other things, adding section 33, which addresses acquisition 
and ownership of FUCOs. In section 33(c)(1), Congress directed the 
Commission to adopt rules concerning FUCO acquisitions by registered 
holding companies. See 15 U.S.C. 79z-5b(c)(1). Under this directive, 
the Commission proposed rules 55 and 56 in 1993, but deferred action 
on those rules in order to consider the comments received on the 
rules. See Holding Company Act Release No. 25757 (Mar. 8, 1993), 58 
FR 13719 (Mar. 15, 1993) (proposing release); Holding Company Act 
Release No. 25886 (Sept. 23, 1993), 58 FR 51488 (Oct. 1, 1993) 
(adopting certain rules, deferring action on rules 55 and 56). The 
Commission will consider reproposing rules 55 and 56 in the near 
future.
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    The utility business is rapidly evolving into a global industry, 
with participants seeking multinational investment opportunities. 
Sweeping political and economic changes worldwide have created a large 
demand for American utility expertise and significant investment 
opportunities for United States companies. Registered public utility 
holding companies have taken advantage of these opportunities. As of 
December 31, 1998, registered holding companies had invested $8.2 
billion in FUCOs and $892 million in domestic and foreign EWGs. Based 
on publicly reported information, we believe that investments made by 
exempt holding companies and public utilities not part of a registered 
or exempt holding company system, are significantly higher.4 
At the same time, foreign energy companies have made significant 
investments in the United States, primarily through acquisition of 
electric wholesale generation units which, by virtue of the Energy 
Policy Act, are exempt from the Act.5 In this Release, we 
are requesting comment on issues relating to the acquisition of U.S. 
utility companies by foreign holding companies.
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    \4\ As of December 31, 1998, holding companies exempt under rule 
2 of the Act had invested $12.3 billion in FUCOs and domestic and 
foreign EWGs. In addition, domestic energy companies that are not 
part of either a registered or exempt holding company system have 
made major investments in FUCOs and EWGs in recent years. For 
example, in 1995 and 1996, PacifiCorp, a public utility company 
operating in the western United States, acquired an Australian 
electric distribution company and an interest in an Australian power 
plant and mine for a total of $1.7 billion. According to a U.S. 
Department of Energy report, U.S. energy companies have played ``a 
major role * * * as investors in the reformed and privatized 
electricity sectors'' in the United Kingdom, Australia and 
Argentina. See Electricity Reform Abroad and U.S. Investment, Energy 
Information Administration, September 1997, at v.
    \5\ In 1998, foreign utilities invested $31.3 billion in the 
United States. See Power Legislation; Foreign Companies Acquiring 
U.S. Utility Systems: Overcoming PUHCA, Power Economics, March 31, 
1999, at p. 23. For example, National Power plc, the U.K.'s largest 
power generator, has invested over $1.0 billion in U.S. generating 
facilities and had announced plans to spend an additional $1.6 
billion on U.S. generation projects and acquisitions. See Overseas 
Investments; National Power Steps Over the Pond, Power Economics, 
Nov. 30, 1998, at 5. In addition, British Energy Inc., a British 
utility, in partnership with PECO Energy Co., an inactive registered 
holding company, have agreed to buy three of four U.S. nuclear 
plants that have been put up for sale in the past year. See 
Christopher Palmieri and John Gorham, Give Me Your Nukes, Forbes, 
Sept. 6, 1999, at 124-25. See also infra note 37.
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III. Acquisition of U.S. Utilities by Foreign Companies

    In 1994, in recognition of the increasingly international nature of 
the energy business, we requested public comment on the concept of 
foreign ownership of U.S. utilities.6 We asked,

[[Page 71343]]

among other things, whether the Holding Company Act permits foreign 
ownership; what conditions should be placed on foreign ownership; 
whether there was a national security interest in restricting foreign 
ownership of U.S. utilities; whether there are difficulties in 
obtaining information from foreign companies that would support 
limitations on foreign ownership; and what types of safeguards or 
limitations on ownership might prevent or minimize such risks.
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    \6\ See Request for Comments on Modernization of the Regulation 
of Public-Utility Holding Companies, Holding Co. Act Rel. No. 26153 
(Nov. 2, 1994), 59 FR 55573 (Nov. 8, 1994).
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    Most commenters appeared to agree that the Holding Company Act did 
not, or should not, prohibit foreign ownership of U.S. 
utilities.7 Commenters suggested that foreign ownership 
could bring some advantages to domestic utilities--increased sources of 
capital (which could reduce the cost of capital) and management 
experienced in dealing with competitive markets.8 Commenters 
agreed that foreign holding companies would and should be subject to 
the same regulatory requirements as U.S. companies.9 Local 
regulators were divided on whether foreign ownership would impede their 
ability to obtain information relevant to ratemaking.10
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    \7\ Consolidated Natural Gas Company; NEES; Southern Company 
(``Southern''); Wisconsin Electric Power Company; City of New 
Orleans; American Gas Association (``AGA''); National Power PLC/
American National Power, Inc.; New York State Bar; Yorkshire 
Electricity Group/National Grid Company (``Yorkshire''). Only two 
commenters, the staff of the Michigan Public Service Commission 
(``MPSC'') and Allegheny Power System (``APS''), suggested that 
foreign ownership should be prohibited. Comments we received in 
response to our initial request for comments may be found in File 
No. S7-32-94.
    \8\ City of New Orleans; Southern; Yorkshire.
    \9\ See, e.g., AGA; City of New Orleans.
    \10\ The MPSC expressed concern that absentee owners may not 
place sufficient emphasis on service and the public interest, and 
that access to books and records may be compromised. On the other 
hand, City of New Orleans stated that foreign ownership would not 
impair access to relevant books and records.
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    Since our initial request for comment, there have been significant 
foreign investments in domestic power projects.11 The 
prospect of foreign ownership of significant U.S. utilities is raised 
by ScottishPower's acquisition of PacifiCorp and National Grid's 
proposed acquisition of NEES.12 ScottishPower has registered 
under the Act, and National Grid has announced its intention to do so. 
The acquisition of a U.S. utility or holding company by a foreign 
company and the acquiror's subsequent registration raise a number of 
interpretative and policy issues under the Act. We think it 
appropriate, therefore, to renew our request for comment on the issues 
related to foreign ownership of U.S. utilities.
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    \11\ See supra notes 4 and 5.
    \12\ See supra note 2.
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A. The Legal Framework

    Federal law imposes various restrictions on foreign ownership of 
some significant industries. Some laws specifically restrict foreign 
ownership.13 Others provide for ownership subject to certain 
conditions. The Federal Aviation Act, for example, establishes 
percentage limitations on board membership and voting interests in 
determining whether an air carrier is considered a United States 
citizen.14
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    \13\ See, e.g., 16 U.S.C. 797 (power production on land and 
water controlled by the U.S. government); 42 U.S.C. 2131-2134 
(prohibition of foreign ownership or control of facilities that 
produce or use nuclear materials); 42 U.S.C. 6508 and 43 U.S.C. 1701 
et seq. (oil and gas leases within the National Petroleum Reserve).
    \14\ See 49 U.S.C. 1301(16) (air carrier considered U.S.citizen 
if president and two-thirds of board of directors and other managing 
officers are U.S. citizens and at least 75% of voting interest is 
owned or controlled by U.S. citizens).
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    In contrast, the Holding Company Act is silent concerning foreign 
ownership of domestic utilities. Nowhere does the Act explicitly 
require that a holding company be organized under U.S. 
law.15 Indeed, we have noted that the Holding Company Act 
``contains no prohibition against foreign holding companies as such.'' 
16 We have not had occasion, however, at least in recent 
times, to address the registration under the Act of a foreign holding 
company.
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    \15\ The key definitions in the Holding Company Act (e.g., 
``electric utility company,'' ``gas utility company,'' ``public-
utility holding company,'' ``holding company,'' ``holding-company 
system'') make no reference to a company's domicile. See, e.g., 
sections 2(a)(3) [15 U.S.C. 79b(a)(3)], 2(a)(4) [15 U.S.C. 
79b(a)(4)], 2(a)(5) [15 U.S.C. 79b(a)(5)], 2(a)(7) [15 U.S.C. 
79b(a)(7)] and 2(a)(9) [15 U.S.C. 79b(a)(9)] of the Act. Section 5 
[15 U.S.C. 79e] of the Act, which sets forth certain procedural 
requirements for registration under the Act, does not refer to the 
domicile of the holding company.
    Section 4(b) [15 U.S.C. 79d(b)] of the Act does make reference 
to holding companies' being organized under state law. This section 
generally requires that a holding company must register with the 
Commission if any of its securities that were publicly offered after 
January 1, 1925 are held ``by persons not resident in the State in 
which such holding company is organized.'' (Section 2(a)(24) of the 
Act defines the term ``State'' to mean ``any State of the United 
States or the District of Columbia.'') The legislative history 
suggests that section 4(b) was included to assure that the Act 
subjected to federal regulation those companies that might in some 
way affect interstate commerce, rather than to require that holding 
companies be organized under state law. See S. Rep. No. 621, 74th 
Cong., 1st Sess. 25:
    [Section 4(b)] subjects to Federal jurisdiction those holding 
companies which, though they may not contemplate new acts in 
interstate commerce in the immediate future, are nevertheless 
affected with a national public interest by reason of the fact that 
they have in the past set in motion through the channels of 
interstate commerce forces which affect investors throughout the 
country, which forces are still in operation in more than one State 
and cannot be effectively dealt with by any State.
    \16\ Gaz Metropolitain, Inc., Holding Co. Act Rel. No. 26170 
(Nov. 23, 1994) (``Gaz Met''). In Gaz Met we approved the 
acquisition of a Vermont gas utility by a Canadian gas holding 
company and granted the holding company an exemption from 
registration under section 3(a)(5) of the Act. Section 3(a)(5) makes 
an exemption available to a holding company that ``is not, and 
derives no material part of its income, directly or indirectly, from 
any one or more subsidiary companies which are, a company or 
companies the principal business of which within the United States 
is that of a public-utility company.''
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    It appears that Congress, in 1935, did not intend or foresee 
ownership of a domestic utility by a holding company domiciled outside 
the United States. The Act places structural and geographic limitations 
upon public-utility holding company systems. Section 11 of the Act 
generally limits a registered holding company to ownership of a single 
``integrated public-utility system,'' defined in terms of a group of 
naturally related operating properties. Under section 2(a)(29) of the 
Act, an integrated public-utility system is ``confined in its 
operations to a single area or region, in one or more States * * *.'' 
17
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    \17\ The provisions of section 11(b)(1)(A)-(C) create an 
exception to the requirement of a single integrated system. Clause B 
would permit a registered holding company to own, in addition to its 
primary U.S. integrated system, an additional system located in a 
contiguous foreign country.
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    For many years, it was generally assumed that the integration 
provisions of the Act would generally preclude a U.S. registered 
holding company from owning both domestic and foreign utility 
properties, especially if the foreign utility operations were located 
in a country not contiguous to the United States.18 For 
virtually identical reasons, the integration provisions were understood 
to bar a holding company with foreign utility operations from acquiring 
a U.S. utility.19
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    \18\ See, e.g., Electric Bond and Share Co., 33 S.E.C. 21 (1952) 
(``the provisions of Section 11(b)(1) stand in almost every detail 
as an unyielding barrier'' to the simultaneous holding of large 
domestic utility operations and utility operations in Cuba, Mexico, 
Central and South America, China and India). See also Report 
Relating to Intercorporate Relations Between the General Public 
Utilities Corp. and the Manila Electric Company, S. Rep. 2787, 84th 
Cong., 2d Sess. (July 25, 1956) (report of Senator Magnuson from the 
Committee on Interstate and Foreign Commerce to accompany H.R. 
10621, a bill to exempt General Public Utilities Corp., a registered 
holding company, from the provisions of section 11(b)(1) of the Act, 
under which we had ordered the holding company to divest its 
Philippine utility subsidiary).
    \19\ See Gaz Met, supra note 16. In Gaz Met, we determined that 
the integration provisions did not bar the Canadian gas holding 
company from owning a Vermont gas utility.
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    In 1992, we determined that a U.S. registered holding company could 
acquire foreign utility properties notwithstanding the integration

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provision.20 In that year also, as discussed previously, 
Congress amended the Holding Company Act to permit the ownership of 
EWGs and FUCOs--utility properties that would not, when combined with 
existing utility properties, constitute an integrated system.
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    \20\ See Southern Co., Holding Co. Act Release No. 25639 (Sept. 
23, 1992) (authorizing registered holding company to acquire 
Australian utility operations). We relied upon the second clause of 
section 10(c)(2), which provides that section 10(c)(2), requiring us 
to find that an acquisition ``will serve the public interest by 
tending towards the economical and efficient development of an 
integrated public-utility system,'' does not apply to an acquisition 
of a public-utility company operating exclusively outside the United 
States. In 1992, also, we granted orders of exemption under section 
3(b) from all provisions of the Act for two newly formed indirect 
Australia subsidiaries of SCEcorp, an exempt holding company. See 
SCEcorp., Holding Co. Act Release No. 25564 (June 29, 1992).
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    Sections 32 and 33 provide that EWGs and FUCOs are not public-
utility companies. Thus, the Act's statutory integration provisions, by 
their terms, are not applicable to these entities. To eliminate any 
doubt that ownership does not implicate the Act's integration 
requirements, section 33(c)(3) provides that ownership of a FUCO is 
considered to be ``consistent with the operation of a single integrated 
public utility system, within the meaning of section 11 * * *.'' 
21 Section 32(h)(1) contains a similar provision for EWGs.
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    \21\ Section 11 also provides that any nonutility business owned 
by a registered holding company be ``reasonably incidental, or 
economically necessary or appropriate, to the operations of such 
integrated public utility system * * *.'' Section 33(c)(3) provides 
that ownership of a FUCO satisfies this standard.
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    Section 33 is neutral on its face with respect to the ownership of 
a FUCO by a foreign holding company.22 It is thus possible 
to construe section 33(c)(1) to allow a foreign holding company to 
qualify its foreign utility operations as a FUCO, and the foreign 
holding company to acquire a U.S. utility without regard to the 
integration of the foreign and domestic operations. As explained above, 
the Act would otherwise generally raise significant barriers to an 
acquisition of U.S. utility properties by a foreign company with 
existing foreign utility properties.
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    \22\ Section 33(a)(1) provides an exemption for a FUCO 
``notwithstanding that the [FUCO] may be a subsidiary * * * of a 
holding company or of a public utility company.'' The nationality of 
the holding company is not a component of the exemption. Similarly, 
section 32 allows ownership of a domestic EWG without regard to the 
owner's nationality.
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    In adopting the Energy Policy Act, Congress did not address this 
possibility and therefore may not have intended this interpretation of 
section 33(c)(1). The legislative history of the Energy Policy Act 
emphasizes that the legislation was designed to enable U.S. companies 
to respond to domestic and overseas investment opportunities. Nothing 
in the legislative history suggests that section 33 was intended to be 
a vehicle for foreign investment in the United States.
    Moreover, although section 33(c)(1) does not expressly preclude 
foreign holding companies, we do not believe it should be interpreted 
to permit a foreign holding company to acquire a U.S. utility if doing 
so would undercut the fundamental purpose of the Act--to protect 
consumers and investors.23 We recognize that foreign 
registered holding companies present novel and important issues. We 
therefore are soliciting comments generally on the registration and 
regulation of foreign holding companies. These comments will inform our 
consideration of rule 55, our consideration of applications and 
requests for interpretative guidance concerning foreign holding 
companies and our review, under section 11, of registration statements 
filed by foreign holding companies. The comments may also suggest an 
additional rulemaking to address these issues.
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    \23\ See Crandon v. United States, 494 U.S. 152, 158 (1990) 
(``In determining the meaning of [a federal] statute, [the court] 
look[s] not only to the particular statutory language, but to the 
design of the statute as a whole and to its object and policy.'') 
(citations omitted).
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B. Areas for Comment

1. General Policies of the Act
    The Holding Company Act was intended to address the practices by 
which small groups of investors, by means of the holding company 
structure, were able to exploit vast networks of utility companies, to 
the detriment of utility consumers and other security holders. The 
specific problems identified by Congress included inadequate 
disclosure, excessive leverage, abusive affiliate transactions, evasion 
of state regulation, and the growth and extension of holding companies 
without regard to the economy of management and operation of system 
utility companies.24
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    \24\ Section 1(b) of the Holding Company Act [15 U.S.C. 79a(b)].
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    We request comment whether foreign registered holding companies, by 
virtue of being foreign, are inconsistent with the Holding Company 
Act's policies. In general, we request comment concerning:
     the effects of foreign ownership on effective Commission 
regulation;
     the effects of foreign ownership on effective state 
regulation;
     the effects of foreign ownership on investor protection; 
and
     the effects of foreign ownership on consumer protection.
    In particular, a registered foreign holding company would likely 
own significant foreign utility operations. The magnitude of these 
foreign utility operations could be significantly greater than those 
currently owned by U.S. holding companies; they could be significantly 
larger than the holding company's U.S. utility system. Will this expose 
U.S. ratepayers to greater risks? Should newly registered, foreign 
holding companies' interests in FUCOs and EWGs be ``grandfathered,'' 
with only post-registration FUCO and EWG investments counted toward the 
aggregate investment test of rule 53(a)(1)? 25 U.S. holding 
companies, in seeking authorization to issue securities to finance the 
acquisition of FUCOs, have represented that they will not seek recovery 
in rates for any losses, or inadequate returns, on their investments in 
FUCOs and EWGs. Will foreign holding companies be in a position to make 
similar undertakings with respect to their FUCO operations?
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    \25\ Rule 53 provides a partial ``safe harbor'' for EWG 
financings by registered holding companies. Among other things, in 
order to qualify for the safe harbor the amount of a registered 
holding company's aggregate investments in EWGs and FUCOs cannot 
exceed 50% of the system's consolidated retained earnings. See rule 
53(a)(1) [17 CFR 250.53(a)(1)].
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    We also request comments on whether structural safeguards can be 
developed to limit the risk that financial problems in the holding 
company's FUCOs will have an adverse effect on U.S. ratepayers and 
security holders of the holding company's U.S. subsidiaries. For 
example, would requiring the U.S. utility subsidiary stock to be owned 
by an intermediate holding company based in the U.S. and organized 
under state law provide any additional protection to U.S. interests? 
Would such intermediate holding companies be consistent with the Act's 
goal of simplifying the corporate structure of holding companies? We 
are particularly interested in the views of state regulators and 
consumers concerning the effects of foreign ownership on state 
regulation and consumer protection.
2. Section 11
    Section 11 has been described by the Supreme Court as the ``very 
heart'' of the Act.26 In addition to the general requirement 
that a registered holding company own a single integrated public-
utility system, section 11 limits nonutility businesses to those that 
are

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``reasonably incidental, or economically necessary or appropriate'' to 
system utility operations, on our finding that the nonutility 
businesses are ``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 or systems.'' Section 11 further 
directs us to require the simplification of the corporate structure of 
registered systems and to ensure that voting power is fairly and 
equitably distributed among security holders.
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    \26\ SEC v. New England Elec. System, 384 U.S. 176, 180 (1966), 
citing North American Co. v. SEC, 327 U.S. 686, 704 n.14 (1946).
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    The policies underlying section 11 must also enter into our 
consideration of the acquisition of a U.S. utility by a foreign 
company. Section 10(c)(1) provides that we cannot approve an 
acquisition if it would be detrimental to the carrying out of the 
provisions of section 11. Section 10(c)(2) provides that we must find 
that the acquisition will serve the public interest by tending towards 
the economical and efficient development of an integrated public-
utility system.
    Section 10(c)(2) ``make[s] clear that the Commission was not to 
approve acquisitions of utility securities merely because of the 
absence of indications of any positive detriment to the carrying out of 
Section 11.'' 27 What types of direct or indirect benefits 
should be considered under section 10(c)(2) when a foreign company 
seeks to acquire a domestic utility? For example, would a domestic 
public-utility system benefit from an affiliation with a financially 
stronger foreign holding company, or a foreign company that has 
experience in operating in competitive markets? Are these benefits a 
sufficient basis for making the findings required by section 10(c)(2)? 
Are there other economies and efficiencies that foreign ownership would 
confer upon a domestic system?
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    \27\ Electric Bond and Share Co., supra note 18, at 31.
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    Commenters should specifically address the key goals of an 
integrated system as reflected in section 2(a)(29)--the ``advantages of 
localized management, efficient operation, and the effectiveness of 
regulation * * *.'' 28 Localized management is a particular 
issue in this context. The advantage of localized management is that 
policies affecting consumers and local regulators are handled by 
persons who are intimately familiar with local conditions and are 
sensitive and responsive to the interests of the community and of 
consumers. This does not necessarily mean that the directors and 
officers of the holding company must be permanent residents of the 
locality. For example, the advantages of localized management can be 
realized where the authority and responsibility for local policy-making 
are properly delegated throughout the service territory of the holding 
company. Would a foreign holding company be able to preserve the 
advantages of local management?
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    \28\ Section 2(a)(29) of the Act.
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    Section 11 not only addresses the integration of utility properties 
but also requires us to limit the nonutility businesses of a registered 
holding company to those that are ``reasonably incidental, or 
economically necessary or appropriate to the operations of'' the 
holding company system. We have interpreted this provision to reflect a 
Congressional policy against nonutility acquisitions that bear no 
functional relationship to the core utility business of the registered 
holding company. We request comments on how this provision should apply 
with respect to non-utility businesses of a FUCO.
3. Other Standards for Reviewing Acquisitions
    Section 9 of the Act provides that, under certain circumstances, 
the acquisition of a public-utility company or public-utility holding 
company requires our prior approval.29 The main purpose of 
section 9 is to prevent ``the growth and extension of holding companies 
[that bear] no relation to economy of management and operation or the 
integration and coordination of related operating properties'' (an 
abuse that led to enactment of the Holding Company Act).30 
Section 10 of the Act sets forth the standards for reviewing 
acquisitions. Section 10(b) provides that we shall approve an 
acquisition unless we affirmatively find that the acquisition will have 
certain adverse consequences.31 Section 10(c)(2) provides 
that we shall not approve an acquisition unless we affirmatively find 
that the acquisition will ``[tend] towards the economical and the 
efficient development of an integrated public-utility system.'' 
Finally, section 10(f) requires us to be satisfied that there is 
compliance with state law.
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    \29\ Section 9(a)(1) of the Act requires our prior approval 
under section 10 of a direct or indirect acquisition by a registered 
holding company of any securities or utility assets.
    Section 9(a)(2) of the Act bars any person who is an affiliate 
of a public-utility or holding company from becoming an affiliate of 
any other public-utility company or holding company without our 
prior approval. Section 2(a)(11)(A) defines an ``affiliate'' of a 
specified company as ``any person that directly or indirectly owns, 
controls, or holds with power to vote 5 per centum or more of the 
outstanding voting securities of such specified company.'' As noted 
above, a FUCO is not a public-utility company for purposes of the 
Act.
    An entity that has no public utility affiliate may acquire the 
securities of a single utility without the need to seek or obtain 
our prior authorization. This acquisition, which is known as a 
``first bite,'' would not be subject to section 9(a)(2). For 
example, ScottishPower concluded that its acquisition of PacifiCorp 
constituted its ``first bite'' for purposes of section 9(a). See 
PacifiCorp proxy statement, dated May 6, 1999, at 69.
    An acquisition of a company having two or more utility 
subsidiaries, however, would simultaneously involve both a ``first 
bite'' and a ``second bite'' and so be subject to section 9(a)(2). 
See Coral Petroleum, Inc., Holding Co. Act Release No. 21632 (June 
19, 1980).
    \30\ See section 1(b)(4) of the Act.
    \31\ In addition to the findings discussed below, we must find 
that the consideration paid in connection with the acquisition is 
not reasonable or does not bear a fair relation to the sums invested 
in or the earning capacity of the utility assets to be acquired or 
the utility assets underlying the securities to be acquired.
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    We request comments concerning whether the foreign nature of an 
acquiror raises any particular issues concerning the application of 
section 10. In addition to the issues relating to section 10(c), we 
must consider the following issues:
    Section 10(b)(1)  Will the acquisition tend towards interlocking 
relations or the concentration of control of public-utility companies, 
of a kind or to an extent detrimental to the public interest or the 
interest of investors, or consumers?
    Traditionally, our evaluation of this factor has been informed by 
federal antitrust policies.32 Should we weigh concentration 
of control issues in view of the increasing internationalization of the 
energy business? Should we continue to rely, where appropriate, upon 
the findings and requirements of other agencies that address the 
potential anticompetitive effects of an acquisition?
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    \32\ See, e.g., Sempra Energy, Holding Co. Act Release No. 26890 
(June 26, 1998) (relying upon findings and remedial measures of the 
Department of Justice, the FERC and the interested state commission 
to address potential anticompetitive effects of acquisition); 
Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993) 
(relying upon hearing records and orders of FERC and state 
commissions). See also Madison Gas and Electric Co. v. SEC, slip 
op., Dkt. No. 98-1216 (DC Cir. Mar. 16, 1999) (``We have previously 
observed that the SEC is entitled to `watchfully' defer to the 
determinations of other regulatory bodies * * *.'') (citations 
omitted).
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    Section 10(b)(3):  Will the acquisition unduly complicate the 
capital structure of the holding-company system of the applicant or be 
detrimental to the public interest or the interest of investors or 
consumers or the proper functioning of such holding-company system?
    We request comments concerning how foreign ownership could ``unduly 
complicate the capital structure of the holding company system * * *.'' 
We would, of course, have to consider whether the holding company has

[[Page 71346]]

issued stock with special voting rights to any particular group or 
class.33 In this regard, we understand that, in connection 
with certain foreign utility privatization transactions, foreign 
governments hold special or ``golden'' shares that give them veto 
rights with respect to certain corporate transactions. We recognize 
that these shares are intended to protect the foreign government's 
regulatory interests rather than to create the type of abusive capital 
structure that led to passage of the Act. Are these types of 
arrangements inconsistent with the Act?
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    \33\ See section 11(b)(2).
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    We would also consider whether foreign law imposed any impediments 
on our ability to inspect the foreign holding company and its 
subsidiaries. Such impediments could be detrimental to the public 
interest, the interests of investors and consumers, and ``the proper 
functioning of [a] holding-company system.''
4. Substantive Regulation of Foreign Holding Companies
    The Holding Company Act imposes a comprehensive federal framework 
of regulation on registered holding companies. A registered foreign 
holding company would be subject to this framework to the same degree 
as a registered domestic company. For example, we must approve:
     issuances and sales of securities; 34
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    \34\ Sections 6 and 7 require our prior approval under specified 
qualitative standards for most types of securities issuances.
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     certain acquisitions; 35 and
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    \35\ Section 11(b)(1) confines the nonutility businesses of a 
registered holding company to those that have a functional 
relationship to its core utility business. Rule 58 under the Act 
permits a registered holding company to acquire certain types of 
non-utility businesses without our approval.
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     sales of utility assets.
We also have jurisdiction over intrasystem transactions. For example, 
section 12 requires our prior approval for a registered holding company 
or its subsidiary ``to lend or in any manner extend its credit to or 
indemnify any company in the same holding-company system.'' Section 13 
authorizes us to regulate service, sales and construction contracts 
between operating utilities within a registered system and other 
companies within the same system and require that such services be 
performed at cost. Finally, registered holding companies are subject to 
extensive reporting, recordkeeping and accounting requirements.
    Despite our jurisdiction over registered holding companies, the 
EWGs and FUCOs owned by a foreign registered holding company, like 
those of a domestic registered holding company, would generally be 
exempt from the Act. Moreover, a FUCO may issue and acquire securities 
without our authorization. A registered holding company with large FUCO 
operations may be able to issue securities through a FUCO to finance 
other businesses. Does this raise significant policy issues under the 
Act, even if the holding company's U.S. utilities do not have any 
liability with respect to those financings?
5. Accounts and Records; Jurisdiction
    The Holding Company Act contains a number of provisions designed to 
prevent companies in registered holding company systems from engaging 
in abusive affiliate transactions. In order for these provisions to be 
effective, we were given the authority to monitor intra-system 
transactions by requiring the making and keeping of holding company 
system records and mandating that we have access to those 
records.36
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    \36\ See section 15 of the Act.
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    We anticipate that we would be able to exercise this authority with 
respect to foreign registered holding companies. We request any 
information concerning possible impediments to our exercise of our 
inspection authority and jurisdiction. Are there difficulties in 
obtaining information from foreign companies that are inconsistent with 
regulation under the Holding Company Act? What types of safeguards or 
limitations on ownership might prevent or minimize such risks?
6. Other Issues
    Are there any other policy issues related to foreign acquisitions 
of U.S. utilities that we should consider? For example, do we need to 
consider national security interests that would be implicated by a 
foreign acquisition of a U.S. utility? 37 We note that the 
President may investigate the national security effects of ``foreign 
control of persons engaged in interstate commerce in the United 
States,'' and suspend or prohibit any acquisition, merger, or takeover 
of such persons in order to protect the national security.38 
United States companies have acquired significant interests in FUCOs 
over the past several years. Would restrictions on foreign ownership of 
U.S. utilities be likely to lead to restrictions on investment in FUCOs 
by U.S. investors?
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    \37\ In response to our prior request for comments, APS raised 
national security concerns. Most of the other commenters did not 
believe that there were any national security concerns or that any 
such concerns should be addressed by Congress. Some federal laws 
specifically restrict foreign ownership of certain regulated 
entities, while others provide for ownership subject to certain 
conditions. See, e.g., 42 U.S.C. 2131-2134 (prohibition of foreign 
ownership or control of facilities that produce or use nuclear 
materials). The Nuclear Regulatory Commission (``NRC'') has 
developed a ``Standard Review Plan'' for use in reviewing nuclear 
power plant licenses involving foreign interests. See Final Standard 
Review Plan on Foreign Ownership, Control, or Domination, 64 FR 5355 
(Sept. 28, 1999). The NRC has approved, with certain restrictions on 
foreign ownership and control, transfers of the operating license 
for three nuclear power plants. See NRC Approves AmerGen's Takeover 
of Clinton Plant, The Energy Daily, Nov. 30, 1999 (describing 
transfers of two operating licenses to AmerGen Energy Co., a company 
jointly owned by PECO Energy Co., an inactive registered holding 
company, and British Energy Inc., a British utility company), and 
PacifiCorp (Trojan Nuclear Plant), 64 FR 63060 (Nov. 18, 1999) (NRC 
order approving transfer of licenses to ScottishPower). See also 
supra note 5.
    \38\ 50 U.S.C. App. 2170. The President has established the 
Committee on Foreign Investment in the United States to administer 
this authority. See 31 CFR 800.101, et seq.

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    Dated: December 14, 1999.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-32952 Filed 12-20-99; 8:45 am]
BILLING CODE 8010-01-P