Public Utility Holding Company Act: Opportunities to Strengthen
SEC's Administration of the Act (08-JUL-05, GAO-05-617).
The Public Utility Holding Company Act of 1935 (PUHCA), which is
administered by the Securities and Exchange Commission (SEC),
subjects public utility holding companies to federal regulation.
Some recent events have raised concerns about SEC's
administration of the act. GAO was asked to review SEC's
administration of PUCHA. GAO's objectives included determining
the nature and the extent to which SEC regulates registered
holding companies and the results of its regulation, the extent
to which SEC reviews claims of exemption and the results of these
reviews, and how SEC determines whether companies have a
controlling influence over public utilities or holding companies.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-05-617
ACCNO: A29279
TITLE: Public Utility Holding Company Act: Opportunities to
Strengthen SEC's Administration of the Act
DATE: 07/08/2005
SUBJECT: Consumer protection
Federal law
Federal regulations
Holding companies
Internal controls
Law enforcement
Policy evaluation
Public utilities
Regulatory agencies
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GAO-05-617
* Report to the Ranking Minority Member, Committee on Energy and
Commerce, and the Honorable Edward J. Markey, House of Representatives
* July 2005
* PUBLIC UTILITY HOLDING COMPANY ACT
* Opportunities Exist to Strengthen SEC's Administration of the Act
* Contents
* Results in Brief
* Background
* Basic Provisions of PUHCA
* Information on Holding Companies
* Information on the Office of Public Utility Regulation
* Other Utility Regulators
* Some Concerns Exist about the Effectiveness and Efficiency of
SEC's Regulation of Registered Holding Companies
* SEC Reviews Applications of Registered Companies Using a
Standardized Process
* PUHCA Examinations May Lead to Consumer Cost Savings
* Outdated Forms and Regulations May Decrease Efficiency of
SEC's Regulation of Registered Companies
* SEC's Flexible Approach in Administering Some Provisions of
the Act Generates Both Support and Questions
* Some Parties Raised Concerns about Slowness in Processing
Applications
* Exempt Company Oversight Has Been Limited, but Recent SEC Actions
Are Designed to Strengthen It
* SEC Only Recently Conducted a Review of Exempt Companies but
Not Those Exempt by Order
* SEC Increases Focus on Monitoring Exempt Companies
* SEC Conducts Analysis and Discussions When Considering PUHCA
No-Action Requests, Similar to Processes in Other Government
Entities
* Staff Conducts Legal Analysis and Engages in Internal and
External Discussions
* Staff's Process for Responding to PUHCA No-Action Letter
Requests Is Similar to Processes in Other SEC Offices and
CFTC
* SEC Evaluates Controlling Influence on an Individual Basis, but
No-Action Letters Reflect an Expanding List of Allowable Consent
Rights
* SEC Evaluates Controlling Influence on a Case-by-Case Basis
* SEC No-Action Letters Have Allowed a Growing List of Consent
Rights
* Conclusions
* Recommendations for Executive Action
* Agency Comments and Our Evaluation
* Objectives, Scope, and Methodology
* Comments from the Securities and Exchange Commission
* GAO Contact and Staff Acknowledgments
United States Government Accountability Office
Report to the Ranking Minority Member,
Committee on Energy and Commerce, and the Honorable Edward J. Markey, House of
Representatives
July 2005
PUBLIC UTILITY HOLDING COMPANY ACT
Opportunities Exist to Strengthen SEC's Administration of the Act
a
PUBLIC UTILITY HOLDING COMPANY ACT
Opportunities Exist to Strengthen SEC's Administration of the Act
What GAO Found
SEC regulates registered holding companies primarily by reviewing their
applications for transactions and conducting periodic examinations that
focus on improperly allocated costs and weak internal controls. As a
result of these examinations, SEC has identified deficiencies at 20
companies since fiscal year 1999, which the agency estimates have resulted
in consumer savings of over $450 million. However, holding companies
identified some PUHCA forms and regulations that are outdated, which SEC
staff plans to address as time and resources become available. Some
parties have also observed that SEC's interpretations of parts of the act
have allowed holding companies to have complex corporate structures and
exposed them to financial risks, but SEC has said that it interprets the
act to respond to the demands of a changing industry. In addition, several
holding companies indicated that SEC processes applications slowly, but
none identified any financial consequences caused by such delays. SEC
improved its timeliness in processing some applications in fiscal year
2004.
While PUHCA allows qualified holding companies to be exempt from
registering under the act either by applying for an SEC order or filing an
annual self-certification form, SEC has not reviewed the activities of all
exempt holding companies to ensure that they continue to qualify for
exemptions. However, in 2004 the staff reviewed the exemptions of all 81
holding companies that claim exemption by self-certification, which could
lead to the revocation of some claimed exemptions. In addition, the staff
did not evaluate the exemptions of holding companies that are exempt by
SEC order as part of this review. SEC plans to take further steps to
strengthen its oversight of exempt companies, including revising the
self-certification form to collect more relevant information from exempt
companies.
SEC has not yet deemed an investor that owns less than 10 percent of the
voting securities of a public utility or holding company to be a holding
company, as defined in the act. SEC has typically granted no-action relief
to these investors. In considering these requests, staff must determine
whether these investment structures contain consent rights that would
allow an investor to exercise such a controlling influence over the
management and policies of its invested entities as to necessitate
regulation as a holding company under PUHCA. Over the past two decades,
SEC staff has issued no-action letters to investors that have acquired an
expanding list of consent rights over public utilities or other holding
companies.
Number of Registered Public Utility Holding Company Systems, 1995-2004
35
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: SEC.
United States Government Accountability Office
Contents
Letter 1
Results in Brief 3 Background 6 Some Concerns Exist about the
Effectiveness and Efficiency of
SEC's Regulation of Registered Holding Companies 12 Exempt Company
Oversight Has Been Limited, but Recent SEC
Actions Are Designed to Strengthen It 25 SEC Conducts Analysis and
Discussions When Considering PUHCA
No-Action Requests, Similar to Processes in Other Government
Entities 28 SEC Evaluates Controlling Influence on an Individual Basis,
but
No-Action Letters Reflect an Expanding List of Allowable Consent
Rights 30 Conclusions 33 Recommendations for Executive Action 35 Agency
Comments and Our Evaluation 36
Appendixes
Appendix I: Objectives, Scope, and Methodology 38 Appendix II: Comments from
the Securities and Exchange Commission 42 Appendix III: GAO Contact and
Staff Acknowledgments 44
Table 1: Complexity of Registered Holding Company Systems in
Table
1995 and 2003
Figure 1: An Example of a PUHCA "Pretzel" Structure 9
Figures
Figure 2: Number of Registered Holding Company Systems,
1995-2004 10 Figure 3: SEC's Office of Public Utility Regulation
Organizational
Chart 11 Figure 4: SEC's Process for Reviewing Applications Filed under
PUHCA 14 Figure 5: Overview of SEC's Examination Program 17 Figure 6: SEC
Estimates of Consumer Cost Savings as a Result of
the PUHCA Examination Program 18 Figure 7: Time Elapsed between PUHCA
Applications Submitted in
Fiscal Years 2003 and 2004 and the Issuance of Related
Orders 24
Contents
Abbreviations
CFTC Commodity Futures Trading Commission
EWG Exempt Wholesale Generator
FERC Federal Energy Regulatory Commission
PUHCA Public Utility Holding Company Act of 1935
SEC Securities and Exchange Commission
This is a work of the U.S. government and is not subject to copyright
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separately.
A
United States Government Accountability Office Washington, D.C. 20548
July 8, 2005
The Honorable John D. Dingell Ranking Minority Member Committee on Energy
and Commerce House of Representatives
The Honorable Edward J. Markey House of Representatives
Congress passed the Public Utility Holding Company Act of 1935 (PUHCA or
the act) to protect consumers and investors from abuses by holding
companies with interests in gas and electric utilities.1 PUHCA, which is
administered by the Securities and Exchange Commission (SEC), subjects
public utility holding companies (holding company) to federal regulation.
PUHCA defines a holding company, in part, as an entity that the Commission
determines to exercise such a "controlling influence" over the management
and policies of a public utility or holding company that it is necessary
or appropriate in the public interest or for the protection of consumers
and investors for the entity to be regulated as a holding company. PUHCA
regulates several activities of registered holding companies, including
the acquisition and issuance of securities, purchases and sales of utility
assets, and transactions among affiliated companies. Also, PUHCA allows
qualified holding companies to be exempt from regulation under the act by
either applying for an SEC order or, in some circumstances,
self-certifying that they satisfy the criteria for exemption annually.
Over the past two decades, several interested parties, including SEC, have
advocated the repeal or amendment of PUHCA. To that end, several bills,
and most recently the Energy Policy Act of 2005, have been introduced to
either repeal or substantially amend the act.2 PUHCA's critics note that
the act is outdated and has largely accomplished its goals of protecting
investors and consumers. The act's critics also maintain that the act
1Public Utility Holding Company Act of 1935, ch. 687, Title I, 49 Stat.
803 (1935) (codified as amended at 15 U.S.C. S:S: 79 - 79z-6 (2000)).
2See, for example, H.R. 6, 109th Congress (2005) and S. 10, 109th Congress
(2005); H.R. 6, 108th Congress (2003); H.R. 1627, 108th Congress (2003);
H.R. 1644, 108th Congress (2003); H.R. 4503, 108th Congress (2004); S. 14,
108th Congress (2003); S. 475, 108th Congress (2003); S. 1005, 108th
Congress (2003); and S. 2095, 108th Congress (2003).
restricts the flow of capital into public utilities and obstructs ongoing
efforts to restructure the utility industry. However, others have
expressed concern that repealing PUHCA could cause the type of abuses that
the utility sector experienced prior to PUHCA's enactment, such as
financial manipulations and anticompetitive practices, to reoccur.
Several recent events have led to concerns about SEC's administration of
the act. For example, questions have been raised as to why SEC has
approved a number of mergers involving geographically dispersed utility
systems, despite PUHCA's requirement that each holding company system be
physically interconnected or capable of physical-interconnection and
operate in a single region or area. Questions have also been raised as to
how SEC reviews exempt holding companies to determine whether they satisfy
the criteria for exemption from the act and how investors that have
received no-action letters-or assurances that SEC staff will not recommend
any enforcement action to the Commission-have been able to avoid
regulation as holding companies, despite making substantial investments in
and acquiring a number of rights over operational matters of public
utilities or holding companies.
This report responds to your August 2004 request that we review issues
relating to SEC's administration and enforcement of PUHCA. Specifically,
our objectives were to determine (1) the nature and the extent to which
SEC regulates registered holding companies and the results of its
regulation, (2) the extent to which SEC reviews claims of exemption-filed
as either self-certifications or applications for SEC orders-and the
results of these reviews, (3) SEC's process for issuing no-action letters,
and (4) how SEC determines whether companies have a controlling influence
over public utilities or holding companies.
To address our objectives, we reviewed selected SEC workpaper files,
pending applications, and recent orders. We conducted structured
interviews with representatives of randomly selected registered holding
companies and representatives of companies that have received PUHCA
no-action letters since 2001, as well as with all SEC staff attorneys and
accountants that have worked in the Office of Public Utility Regulation
for over 6 months. We also interviewed senior SEC staff from the Office of
Public Utility Regulation and officials from the Offices of the Chief
Counsel within SEC's Divisions of Corporation Finance and Investment
Management, SEC's Inspector General, the Commodity Futures Trading
Commission (CFTC), the Federal Energy Regulatory Commission (FERC),
interested industry groups, and other knowledgeable parties. In addition,
we interviewed knowledgeable officials from the three major credit rating
agencies, as well as officials from selected state utility commissions
throughout the United States.
We conducted our work from August 2004 to July 2005 in Washington, D.C.,
and New York, N.Y., in accordance with generally accepted government
auditing standards. Appendix I describes the objectives, scope, and
methodology of our review in more detail.
SEC reviews applications of registered holding companies seeking SEC
Results in Brief
approval to engage in transactions regulated under the act. In addition,
SEC conducts periodic examinations of registered holding companies, which
focus on how costs are allocated within the holding company system and the
effectiveness of internal controls. Currently, SEC tries to examine five
holding company systems per year but plans to increase the frequency of
these examinations to seven to eight per year. SEC officials estimated
that steps taken by these companies to correct deficiencies identified in
PUHCA examinations have resulted in consumer savings of over $450 million
since fiscal year 1999, with most of the savings attributable to one
holding company's reallocation of its tax benefits in fiscal year 2004. In
addition, some registered holding companies we spoke with identified PUHCA
forms and regulations that are outdated and may need revision. SEC staff
is aware of some of these concerns and is currently developing
recommendations for regulatory changes that could impact registered
holding companies. Some actions that SEC has taken in recent years have
led interested parties to conclude that SEC interprets PUHCA flexibly by
allowing holding companies to have complex corporate structures and
exposing them to more risk. SEC has indicated that a certain amount of
flexibility in interpreting PUHCA is necessary in a changing utility
industry to protect consumers and investors. Similarly, some industry
participants have also observed that PUHCA restricts SEC's ability to
respond to developments in the utility industry. Industry participants
also raised concerns about the length of time SEC needs to process
applications. For example, 8 of the 13 holding companies we spoke with
indicated that SEC issues notices and orders in response to PUHCA
applications either somewhat slowly or very slowly, although none
identified any financial consequences as a result of SEC's delays.
Although SEC improved its timeliness in processing some applications in
fiscal year 2004, several registered companies pointed to inadequate
staffing levels as a reason for SEC's slowness. Meanwhile, SEC staff
attorneys and accountants attributed lengthy processing times to multiple
layers of internal review by senior staff, among other possible reasons.
SEC has not conducted a thorough review of all exempt holding companies to
ensure that they continue to qualify for an exemption from PUHCA and do
not need to be subject to SEC regulation under the act. However, SEC has
recently made efforts to improve how it oversees exempt holding companies.
Specifically, in 2004, the staff conducted a review of all 81 holding
companies that claim exemption by self-certification, which could lead to
the revocation of some exemptions. Nevertheless, SEC staff did not
evaluate the utility activities of holding companies that are exempt by
SEC order, as part of its review, because these companies are not
generally required to regularly provide SEC with information about their
utility activities. In fact, SEC cannot reliably estimate the number of
holding companies that continue to operate under previously issued
exemptive orders and continue to be entitled to such exemptions. For
example, while the agency estimates that 50 holding companies are exempt
by order, this figure does not include holding companies that received
exemptive orders because they were incidentally or temporarily holding
companies. SEC officials told us that the agency plans to continue to
improve its oversight of exempt companies as time and staff resources
allow. For example, SEC staff is currently reviewing the
self-certification forms that companies submitted in 2005. In addition,
the staff plans to recommend a number of changes to the self-certification
form that could allow the form to serve a more useful regulatory function.
SEC staff responds to requests for no-action relief from PUHCA by
performing legal analyses about proposed transactions and sharing its
opinions internally about whether to grant no-action relief. In addition
to internal discussions, SEC staff also corresponds regularly with counsel
for the requesting entities to help them clarify and focus their requests.
This approach is similar to those of other SEC offices and CFTC, which
also issue no-action letters.
SEC has historically evaluated the presence of controlling influence over
the management or policies of a holding company or public utility on a
case-by-case basis, considering factors such as the relationship between
the holding company and the public utility, the nature of intercompany
contracts, and whether there will be adequate oversight to protect
consumers and investors. However, these cases all involved holding
companies that own 10 percent or more of the voting securities of a public
utility or a holding company. Although SEC has not yet declared an
investor owning less than 10 percent of the voting securities of such
companies to be a holding company, SEC staff has granted no-action relief
to these types of investors seeking assurances that they are not holding
companies. The staff's analyses of these no-action letter requests
typically include a review of consent rights to be acquired by the
investor in the proposed transaction to determine whether controlling
influence is present. Since 1986, staff has issued no-action letters to
investors that have proposed investment structures that include a growing
number of consent rights over operational matters concerning the invested
entities. As a result, some interested parties have called for SEC to
clarify which consent rights would cause an investor to exert the
necessary controlling influence to require regulation as a holding
company. However, SEC staff explained that more explicit guidance on
permissible consent rights would not be feasible because investors could
structure future transactions with new or different combinations of
consent rights. Nevertheless, it may be beneficial for SEC staff and
investors for SEC to issue general guidelines setting forth minimum
standards that utility investors must satisfy for the staff to find that
they do not exert a controlling influence. These guidelines could help
clarify for the staff as to when it is appropriate to issue a no-action
letter and for the industry on how SEC determines whether a controlling
influence is present.
This report makes recommendations designed to improve SEC's oversight of
registered and exempt holding companies, as well as to clarify the
conditions under which SEC staff may issue no-action letters to utility
investors. These recommendations include establishing target time frames
for processing PUHCA applications and creating an action plan for
establishing time frames for making improvements to existing PUHCA forms
and developing a system to collect and analyze information contained in
companies' PUHCA filings to enable SEC staff to better monitor the
activities of registered companies. We recommend that SEC expedite its
planned evaluation of the different legal options for requiring companies
that are exempt by order to provide additional information on their
operations and create a plan for conducting future reviews of companies
claiming exemptions. We also recommend that SEC develop and publish
guidelines that set forth the minimum standards that utility investors
must satisfy for the staff to find that they do not exert the necessary
controlling influence to require regulation as a holding company. Finally,
we recommend that SEC conduct a study on the impact of its administration
of PUHCA in the last decade. We requested comments on a draft of this
report from the Chairman, SEC. SEC provided written comments that are
reprinted in appendix II. SEC noted that the agency has
Background
ongoing initiatives to improve its administration of the act and agreed
with some of the recommendations, but did not address others. Further, SEC
did not address whether it would develop action plans for other
recommendations as we believe are necessary. SEC's comments are discussed
in greater detail at the end of this report.
Prior to PUHCA, ownership of the nation's utilities was concentrated in a
small number of holding companies. Many of these holding companies had
developed complex, multistate structures, with highly diversified
interests throughout the country. These structures triggered concerns that
holding companies exploited consumers by charging excessive utility rates
and investors by selling securities without providing adequate information
on the conditions surrounding their issuance. The multistate character of
these holding companies also obstructed effective state regulation of
subsidiary utilities.
Basic Provisions of PUHCA
In response to these concerns, PUHCA imposed a number of restrictions on
registered holding companies to protect consumers and investors that
include:
o Integration and simplification-Each holding company is generally
limited to owning a single integrated public utility system, defined as a
group of related operating properties confined in its operations to a
single area or region, not so large as to impair the advantages of
localized management, efficient operations and effective regulation. In
addition, holding companies may only acquire nonutility businesses that
are reasonably incidental or economically necessary or appropriate to the
operations of an integrated utility system.3
315 U.S.C. S:S: 79b(a)(29) and 79k(b)(1).
o Issuance and acquisition of securities and assets-SEC must approve the
issuance of securities by a holding company or any of its
subsidiaries. In particular, securities must be reasonably adapted to
a company's earning power. SEC must also approve the acquisition by a
holding company of any securities, utility assets or other business
interests.4
o Service company regulation-Service, sales, and construction contracts
between a subsidiary of a holding company and any other company in the
same holding company system must be performed "economically and
efficiently" and be "equitably allocated" among subsidiaries.5
* Upstream or intrasystem loans-PUHCA also prohibits holding
companies from receiving "upstream" loans from any of its
subsidiaries.6
* PUHCA allows holding companies that meet any of five statutory
criteria to apply for an order of exemption from registration
under the act. Under Section 3 of the act, SEC must exempt a
holding company from any provision of the act if it meets one of
the following criteria:7
o It and all of its utility subsidiaries from which it derives any
material part of its income are predominantly intrastate in character.
o It is predominantly an operating public utility company and operates
in the state in which it is organized and contiguous states.
o It is only incidentally a holding company.
o It is only temporarily a holding company.
415 U.S.C. S:S: 79g(d) and 79i(a)(1). 515 U.S.C. S: 79m(b). 615 U.S.C. S:
79l(b). 7However, SEC may deny an exemption if it finds that an exemption
would be detrimental to
the public interest or the interest of consumers and investors. 15 U.S.C.
S: 79c(a).
Page 7 GAO-05-617 Public Utility Holding Company Act
Information on Holding Companies
o It is not principally a public utility business within the United
States nor does it derive any material part of its income from public
utility companies operating within the United States.
Holding companies can be exempt from registration under any of these
provisions by applying for an SEC order. Alternatively, under Rule 2 of
the act, companies that meet either of the first two criteria may claim
exemption by making an annual self-certification filing on SEC Form U-3A-2
and be recognized as exempt without further action from SEC.8
Except for Section 9(a)(2) of the act, exempt companies are generally not
subject to SEC's continuing regulatory supervision.9 Under Section
9(a)(2), any affiliated company-including an exempt holding company-of a
holding company or a public utility must obtain SEC approval before it
acquires any security of an affiliated holding company or public
utility.10
Section 2(a)(7) of PUHCA provides two definitions of a holding company.
First, the act defines a holding company as a company that owns or
controls 10 percent or more of the voting securities of a public utility
or another holding company.11 The act also defines a holding company as an
entity that the Commission determines, after notice and an opportunity for
a hearing, to exercise such a "controlling influence" over the management
or policies of a public utility or holding company that it is necessary or
appropriate in the public interest or for the protection of investors and
consumers for the utility to be regulated as a holding company.12 However,
through an investment structure known in the utility industry as a "PUHCA
pretzel," some investors have obtained SEC staff assurances that the staff
will not recommend enforcement action against them. Thus, these investors
have not registered or claimed exemption from the act. Under this
investment structure, investors purchase less than 10 percent of the
voting securities-but a large percentage of the total equity through
817 C.F.R. S: 250.2 (2004). 915 U.S.C. S: 79i(a)(2). 10PUHCA defines an
affiliate company to include an entity that owns 5 percent or more of
the voting securities of another company. 15 U.S.C. S: 79b(a)(11). 1115
U.S.C. S: 79b(a)(7)(A). 1215 U.S.C. S: 79b(a)(7)(B).
nonvoting interests-of a holding company, which directly or indirectly
owns a public utility. In addition, investors acquire a series of
rights-called consent rights-which would require the investor's consent
before the invested entities could engage in various transactions, such as
issuing securities or acquiring new assets. An example of this
relationship is presented in figure 1.
Figure 1: An Example of a PUHCA "Pretzel" Structure
The investor may Investor
have certain
consent rights
over the holding The investor owns less than 10
company or the percent of the voting securities,
but a
utility that allows larger percentage-such as 80
the investor to exercise Holding company percent or more-of the total
authority over ownership interest in the holding
company through nonvoting
interests.
operational
matters. The holding company then owns a
public utility or another public
utility
holding company.
Public utility/
holding company
Source: GAO.
As a result of heavy merger and acquisition activity within the utility
sector, the number of holding companies that have registered under the act
has more than doubled over the past decade, as shown in figure 2. As of
December 31, 2004, 31 holding companies-which in turn owned an additional
25 intermediate holding companies-had registered under the act. This
figure reflects a slight increase since December 2003, when 29 parent
holding companies with $653 billion in assets were registered under the
act. By contrast, in June 1995, only 15 holding companies were registered
under the act.
Information on the Office of Public Utility Regulation
Figure 2: Number of Registered Holding Company Systems, 1995-2004 35 30 25
20 15 10 5 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year
Source: SEC.
The Office of Public Utility Regulation, which is part of SEC's Division
of Investment Management, is responsible for administering PUHCA. SEC
staff that works in this office reviews applications filed under the act,
examines registered holding companies, and monitors industry activity,
among other responsibilities. In addition, staff also issues "no-action
letters," or assurances that it will not any recommend enforcement action
to the Commission against entities seeking to engage in activities that
may raise questions under the act. No-action letters often provide
creditors with assurance that an entity seeking financing will not later
be subject to enforcement action under PUHCA.
As of January 2005, the Office of Public Utility Regulation had 25
full-time equivalents, including 17 attorneys, six financial analysts or
accountants, and two support staff.13 The office is divided into three
branches: Applications Branch #1, Applications Branch #2, and the Branch
of Auditing and Financial Policy. Each branch is headed by one or more
13These figures of full-time equivalents do not include the Associate
Director or the Director of Investment Management.
Page 10 GAO-05-617 Public Utility Holding Company Act
branch chiefs, who report directly to the Assistant Director. The
Assistant Director is responsible for overseeing day-to-day operations and
reports to an Associate Director, who splits time between managing this
office and another office within the Division of Investment Management.
The Associate Director reports to the Director of the Division of
Investment Management. The office also has two special counsels who review
no-action requests, provide legal advice on rulemaking issues, and analyze
and help formulate recommendations to the Commission concerning novel
issues under PUHCA. Figure 3 provides an organizational chart of the
Office of Public Utility Regulation.
Figure 3: SEC's Office of Public Utility Regulation Organizational Chart
Director of the Division of Investment Management
Oversees regulation of investment companies and advisers and public
utitlity holding companies.
Associate Director
Divides responsibilities between the Office of Public Utility Regulation
and another office within the Division of Investment Management.
Assistant Director
Responsible for the Office of Public Utility Regulation's day-to-day
operations.
Applications Branch #1 Applications Branch #2 Branch of Auditing In
addition, 2 special counsels and and Financial Policy 1 secretary report
directly to the
o Consists of 1 branch chief and 5 o Consists of 2 part-time branch
Assistant Director.
staff attorneys. chiefs, 5 staff attorneys, and 1 o Consists of the
Chief Financial paralegal. Analyst, 5 accountants, and 2 staff o The
special counsels review no-
o Attorneys analyze and review
attorneys. action requests, provide legal PUHCA filings. o Attorneys
analyze and review
advice on rulemaking issues, and
PUHCA filings. o This branch examines registered analyze and help
formulate holding company systems and recommendations to the oversees the
financial and Commission concerning novel accounting practices and
reporting issues. requirements of registered and exempt holding companies.
Source: GAO analysis of SEC information.
Other Utility Regulators
In addition to SEC, other federal and state government entities also have
oversight responsibilities for utilities. Both FERC and relevant state
utility commissions generally must approve both the issuance of any
securities that will finance utility operations and the acquisition of
utility assets by utility companies.14 In addition, state utility
commissions have jurisdiction over electric and gas utility companies that
operate in their state. However, according to SEC, most state utility
commissions do not have authority over the books and records of the
holding companies of those utilities and have only limited authority to
regulate affiliate transactions within holding company systems.
Some Concerns Exist about the Effectiveness and Efficiency of SEC's Regulation
of Registered Holding Companies
SEC regulates registered holding companies primarily by reviewing their
PUHCA applications that seek SEC approval to engage in various
transactions and conducting periodic examinations to identify improperly
allocated costs and weak internal controls. SEC's current goal is to
examine five holding company systems per year but plans to increase the
frequency of these examinations. SEC officials estimated that these
examinations have resulted in consumer savings of over $450 million since
fiscal year 1999 as a result of cost and tax benefit reallocations and
improvements in the efficiency of 20 different holding company systems.
However, roughly 72 percent of these cost savings were due to one
company's reallocation of its tax benefits in fiscal year 2004. Some
registered holding companies pointed out that several PUHCA forms and
regulations are outdated and questioned the usefulness of some compliance
requirements. Over the past decade, SEC has indicated that it is committed
to interpreting PUHCA flexibly-i.e., in a manner that recognizes
technological advances and other trends in the utility industry. However,
some industry participants have indicated that PUHCA restricts SEC's
ability to respond to developments in the utility industry. On the other
hand, some interested parties have raised concerns that this flexible
approach has allowed some holding companies to have complex corporate
structures and exposed them to more risk. In addition, some holding
companies perceived SEC to be slow in issuing notices and orders in
response to PUHCA applications, but none identified any financial
consequences as a result of SEC's delays. While SEC improved its
timeliness in processing some applications in fiscal year 2004, some
companies suggested inadequate staff resources as a reason for SEC's
14The authority of state utility commissions varies from state to state.
SEC Reviews Applications of Registered Companies Using a Standardized
Process
slowness in processing applications. By contrast, many SEC staff
attributed lengthy processing times to multiple layers of internal review.
SEC reviews applications of registered holding companies seeking authority
to engage in transactions that are regulated under PUHCA using a
standardized process. SEC regulations provide the staff with delegated
authority to issue notices and orders in response to applications that do
not present novel legal questions and for which no request for a hearing
has been received.15 For transactions that also require approval from
state commissions or other federal agencies, such as FERC, it is SEC's
policy to wait until other regulatory bodies have approved the transaction
before SEC will formally consider it. As shown in figure 4, upon receipt
of a PUHCA application, senior SEC staff assigns a staff attorney and
accountant to the filing. After internal consultations, staff may request
additional information and amendments from the applicant. Staff will then
summarize pertinent information from the application in a notice that
appears in the Federal Register. After publication of the notice,
interested parties have 25 days to request a hearing on the proposed
transaction. If no requests for a hearing are received or the issue does
not raise a novel legal question or public interest concerns, the staff
will issue an order approving the proposed transaction. Otherwise, the
Commission must issue the order or hold a hearing on the matter.
1517 C.F.R. S:200.30-5. However, the Commission must issue orders for
applications that raise novel legal questions or at the discretion of the
Director of the Division of Investment Management.
Page 13 GAO-05-617 Public Utility Holding Company Act
Figure 4: SEC's Process for Reviewing Applications Filed under PUHCA
Sources: GAO (analysis); Nova Development (images).
aSEC may request additional information and amendments from companies
after SEC issues a notice or order.
PUHCA Examinations May Lead to Consumer Cost Savings
SEC may not reject a PUHCA application without providing the applicant
with an opportunity for a hearing. Over the past several years, only two
applications have resulted in hearings. Both SEC officials and some
registrants acknowledge that, because of the time and expense involved in
participating in a formal proceeding, holding companies will usually
revise the terms of their original applications to resolve differences of
opinion with SEC informally. In its review of financing applications, one
of SEC's objectives is to protect the financial integrity of registered
holding companies by, for example, requiring holding companies and their
utility subsidiaries seeking financing authority to have a
equity-capitalization ratio of at least 30 percent. This aspect of SEC's
administration of PUHCA-that is, a review of the financial condition of a
registrant-differs from its administration of other securities statutes,
in which SEC reviews security issuances primarily by promoting full and
fair disclosure and preventing and suppressing fraud.16
SEC also regulates registrants by conducting periodic examinations of
their operations. These examinations focus on whether holding companies
have proper internal controls to ensure financial integrity and whether
costs are allocated equitably, economically, and efficiently among
subsidiaries in the same holding company system. The examination manual
issued in May 2003 indicated that the staff intends to examine up to five
holding company systems per year so that all the registered systems would
be examined on a 6-year cycle. The staff has taken steps to meet this goal
by completing seven examinations between fiscal years 2003 and 2004.
Moreover, with the recent hiring of two new staff, SEC plans to begin
examining seven to eight holding company systems per year.
Examination teams generally consist of five examiners from the Branch of
Auditing and Financial Policy, with additional staff attorneys assigned,
as needed. The examination team will also invite staff from other
regulatory bodies, such as FERC and the relevant state utility
commissions, which may have different examination objectives than SEC, to
work alongside the
16However, under Rule 15c3-1 of the Securities Exchange Act of 1934, SEC
requires registered broker-dealers to maintain minimum net capital ratios
that would allow them to meet obligations to customers and other market
participants and to provide a cushion of liquid assets to cover potential
market, credit, and other risks. 17 C.F.R. S: 240.15c3-1.
Page 15 GAO-05-617 Public Utility Holding Company Act
examination team.17 The team will then review the public filings and other
materials of the registered company it plans to examine. As shown in
figure 5, the examination itself consists of three phases:
s and inconsistencies in a company's PUHCA
filings.
17FERC usually declines SEC's invitation. In addition, SEC will seek the
holding company's permission before inviting state regulators to an
examination, as most state statutes restrict states' authority over
holding companies.
Page 16 GAO-05-617 Public Utility Holding Company Act
Figure 5: Overview of SEC's Examination Program
Sources: GAO (analysis); Nova Development (images).
Unlike other securities statutes, PUHCA does not provide SEC with
administrative enforcement authority such as the ability to issue cease
and desist orders. Instead, SEC must seek injunctive relief in federal
district court. Nevertheless, SEC officials explained that the vast
majority of holding companies voluntarily resolve any compliance
deficiencies with SEC, as companies generally want to maintain positive
relationships with their regulators.
According to SEC estimates, between fiscal years 1999 and 2004, consumers
saved as much as $458.2 million as a result of staff recommendations to
reallocate costs and tax benefits within holding company systems and
improve the efficiency of service company operations, as shown in figure
6. Over this period, SEC examination teams identified misallocated costs,
tax benefits, and other inefficiencies within 20 holding company systems.
However, according to one agency official, $330 million-or 72 percent-of
the total cost savings is attributable to one parent holding company's
reallocation of its tax benefits to an intermediate holding company in
fiscal year 2004. In addition, these figures may overstate the true
benefit of PUHCA examinations to utility consumers. For example, SEC
officials presume that the benefits of cost and tax benefit reallocations
and other system improvements are passed down to consumers in the form of
lower utility rates and that state utility commissions consider these
improvements when setting rates. However, SEC generally does not provide
affected state commissions with copies of its examination findings.
Instead, state commissions must request the findings from the holding
companies themselves, which are not obligated to disclose them. As a
result, according to SEC staff, state commissions may not be aware when
setting utility rates of the savings that SEC examiners identified.
Figure 6: SEC Estimates of Consumer Cost Savings as a Result of the PUHCA
Examination Program Dollars in millions 350 300 250 200 150 100 500
1.3 2.1
0 1999 2000 2001 2002 2003 2004a Fiscal year
Total savings FY1999 - FY2004: $458,219,00
Source: SEC. a
Not including the $330 million of reallocated tax benefits within one
holding company system, SEC's estimate of consumer cost savings would be
less than $20 million in fiscal year 2004.
Outdated Forms and Some registered holding companies indicated that they
have to complete PUHCA forms and follow regulations that are outdated and
may not serve a
Regulations May Decrease Efficiency of SEC's Regulation of Registered
Companies
Page 18 GAO-05-617 Public Utility Holding Company Act
useful regulatory purpose.18 Specifically, 10 of the 13 holding companies
indicated that the annual report that registered holding companies must
file requires them to disclose information that they already disclose to
SEC under other securities statutes. A number of registrants also observed
that it is not clear how SEC uses the information that companies provide
in other filings, such as the quarterly report for energy-related or
gas-related subsidiaries and the annual report for service companies.
These holding companies observed that SEC rarely contacts them to clarify
information in those filings, unless they are the subject of an
examination. Similarly, in 2003, the SEC Inspector General also reported
that many of the PUHCA forms are outdated, ineffective, or contain
requirements that do not currently serve a useful regulatory purpose. In
addition, some registered companies we spoke with indicated that Rule 70,
which restricts the affiliations of members of a holding company's board
of directors, may limit their ability to recruit and retain skilled
directors.19
SEC officials are aware of some of these concerns and, as time and
resources permit, plan to recommend a variety of regulatory changes that
could impact registered companies. For example, officials indicated that
they plan to simplify some forms to eliminate the filing of duplicate
information that companies already submit in other SEC forms. One official
also acknowledged that SEC may not review all companies' filings upon
submission and told us that staff has discussed the possibility of
developing a system that would collect relevant information contained in
these filings. This type of system could help SEC better monitor the
activities of registered companies on an ongoing basis and allow some
PUHCA forms to serve a more useful regulatory purpose than they currently
do. Officials also told us that they plan to recommend changes to Rule 70,
which may be outdated in light of other securities acts and stock exchange
rules that restrict the affiliations of company directors. Nevertheless,
SEC officials indicated that they are limited from devoting significant
time and attention to these initiatives due to available staff resources.
18SEC can only amend PUHCA forms through rulemaking initiatives. 197
C.F.R. S: 250.70.
Page 19 GAO-05-617 Public Utility Holding Company Act
SEC's Flexible Approach in Administering Some Provisions of the Act
Generates Both Support and Questions
Some interested parties and SEC have observed that the agency administers
parts of PUHCA flexibly. For example, in the last several years, SEC has
approved a series of mergers involving utility systems that are separated
by hundreds of miles and are connected by small connector lines or
transmission systems owned by other utilities, despite the act's
requirement that utility systems be geographically integrated and operate
in a single area or region.20 SEC and some industry participants have
stated that this flexibility is necessary to make the act relevant and
protect consumers and investors in a rapidly changing industry, in which
the geographic scope of energy service has greatly expanded. In addition,
some industry participants have indicated that PUHCA restricts SEC's
ability to respond to developments in the utility industry. Currently, SEC
puts more emphasis on whether a merger or an acquisition will be
economical and subject to effective regulation than on the integration
requirements to recognize the changing environment of the utility
industry. However, two public power organizations have raised concerns
that SEC's interpretation of the integration requirements would
effectively end enforcement of the act and encourage the formation of vast
holding companies that the act was designed to prevent from recurring.21
Recently, an SEC administrative law judge made an initial ruling that one
such merger-between American Electric Power, an Ohio-based holding
company, and Central and Southwest Corporation, a Texas-based holding
company-did not satisfy PUHCA's single area or region requirement.22
American Electric Power has petitioned for Commission review of this
decision.
20Section 10(c)(1) and, by reference, Section 11(b)(1) of PUHCA require
SEC to find that the utility operation to be acquired by a holding
company, when combined with its existing utility operations, will result
in a "single integrated public-utility system." See 15 U.S.C. S:S: 79j(c)
and 79k(b)(1). PUHCA defines a "single integrated public utility system"
with respect to an electric utility, in pertinent part, as one that is
physically interconnected or capable of interconnection and operates in a
single area or region. See 15 U.S.C. S: 79b(a)(29)(A). Examples of
acquisitions that SEC concluded satisfied the "integration" requirement
include mergers in 2000 between Northern State Power Company (Minnesota
and Wisconsin) and New Century Energies (Colorado, New Mexico and Texas)
to form Xcel Energy and between PECO (Pennsylvania) and Unicom Corporation
(Illinois) to form Exelon. See New Century Energies, Inc. and Northern
States Power Company; 2000 WL 1160583 (2000) (Approval Order) and Exelon
Corporation, 73 S.E.C. 1336 (2000) (Approval Order).
21See Statement of Position and Narrative Summary of Evidence and Legal
Theories of the National Rural Electric Cooperative Association and the
American Public Power Association, File No. 3-11616, (Nov. 30, 2004).
22See American Electric Power Company, Inc., Release No. ID-283, 2005 WL
1036365 (May 3, 2005).
Some interested parties have also raised concerns about the relaxation of
restrictions on holding companies' ownership of nonutility subsidiaries.
Through a series of statutory and regulatory amendments, both Congress and
SEC have allowed registered holding companies to diversify into nonutility
activities. For example, Congress amended PUHCA in 1992 to allow
registered companies to own facilities called Exempt Wholesale Generators
(EWGs), defined as companies engaged exclusively in the business of owning
or operating facilities that generate and sell electricity at wholesale
rates.23 In addition, in 1997, SEC adopted Rule 58, which provides an
exemption from the requirement of prior SEC approval before registered
companies and their utilities may acquire interests in certain types of
nonutility energy-related or gas-related companies, including energy
trading companies.24 As a result of these changes, the complexity of
registered systems has grown tremendously. For example, in 1995, the 15
registered holding company systems consisted of less than 500 total
companies. By contrast, the 29 systems that were registered, as of
December 2003, consisted of over 6,500 total companies, including roughly
5,000 nonutility subsidiaries, as shown in table 1. While Congress and SEC
have indicated that these changes were necessary to promote competition in
the wholesale energy market and respond to the demands of a rapidly
changing industry, some industry groups and credit rating agencies have
stated that holding companies' diversification into unregulated activities
has exposed registered companies to greater risks.
23See Energy Policy Act of 1992 S: 711, 15 U.S.C. S: 79z-5a (2000).
2417 C.F.R. S: 250.58. Energy trading companies broker and market energy
commodities, which involves selling electric power in the wholesale market
by taking advantage of price differentials in back-to-back purchases and
sales. Examples of other nonutility energy-related companies include,
among others, companies that provide energy management or demand-side
management services and sell electric and gas appliances. The exemption
provided by Rule 58 with respect to the acquisition by registered holding
companies of energy-related companies is limited to investments that do
not exceed the greater of $50 million or 15 percent of the holding
company's total capitalization.
Table 1: Complexity of Registered Holding Company Systems in 1995 and 2003
1995 2003
Parent holding companies 15 29
Intermediate holding companies 0 29
Electric or gas utility subsidiaries 106 147
Nonutility subsidiaries 229 4,999
EWGs 46 125
Foreign utility companiesa 35 167
Inactive subsidiaries 55 1,012
Total companies 486 6,508
Source: SEC.
aForeign utility companies, defined as utility companies that do not
operate within the United States and do not derive any material income
from U.S. sales, are generally exempt from the provisions of PUHCA.
SEC may also exercise flexibility when approving financing authority for
financially troubled holding companies and their subsidiaries. For
example, since fiscal year 2003, SEC has approved transactions for two
companies, Allegheny Energy Inc. and Xcel Energy, Inc., and their
subsidiaries to help them avert potential bankruptcy filings.25 In both
cases, although the companies were unable to meet SEC established
thresholds for certain financial ratios,26 SEC authorized various
transactions, including the payment of dividends by the subsidiaries to
their parent companies out of capital and unearned surplus. According to
agency officials, SEC needs to weigh the costs and benefits of approving
transactions for financially troubled companies very carefully. They
stated that because bankruptcy proceedings would hurt investors and may
ultimately lead to higher utility rates for consumers, SEC generally
grants registrants the necessary financing authority to help them avoid
bankruptcy. In addition, SEC officials explained that they monitor the
activities of financially-distressed holding companies closely.
Nevertheless, in the Allegheny matter, one
25See Allegheny Energy, Inc., et al., Holding Co. Act Release No. 27579
(Oct. 17, 2002); Allegheny Energy, Inc., et al., Holding Co. Act Release
No. 27652 (Feb. 21, 2003), Allegheny Energy, Inc., et al. Holding Co. Act
Release No. 27701 (Jul. 23, 2003); Allegheny Energy, Inc., et al., Holding
Co. Act Release No. 27963 (Apr. 29, 2005); and Xcel Energy Inc., Holding
Co. Act Release No. 276812 (May 29, 2003).
26Generally, SEC requires companies to maintain a benchmark
equity-capitalization ratio of 30 percent.
Some Parties Raised Concerns about Slowness in Processing Applications
interested party recently raised concerns about Allegheny's commitment to
improving its financial condition and asked SEC to take further steps to
ensure that Allegheny's utility customers are adequately protected or hold
a hearing on renewing the company's financing authority.27 However, in an
April 2005 order that extended Allegheny's about-to-expire financing
authority, the Commission denied the party's request for a hearing on the
grounds that the request did not raise a material issue of fact or law in
the context of the authority that the Commission did grant.28
Several industry participants raised concerns about what they perceived to
be delays in SEC approving PUHCA applications. Specifically, 8 of the 13
registered holding companies we spoke with indicated that SEC issues PUHCA
notices and orders either somewhat slowly or very slowly. Nevertheless, no
holding company could identify an instance in which SEC delays had ever
caused it to miss a deadline that had financial consequences. While staff
collects data to track the status of applications to allow managers and
the Commission to monitor the office's productivity, the agency has no
formal performance goals for how quickly it should issue PUHCA notices and
orders. As a result, we had no benchmark against which to determine
whether SEC's review of PUHCA applications is timely.
In 2003, the SEC Inspector General also found that some PUHCA applications
may not be processed in a timely fashion and recommended that staff
establish time frames for processing applications by, among other options,
setting target dates for issuing notices and orders, on a case-by-case
basis.29 However, SEC staff has not yet implemented the Inspector
General's recommendation. According to agency officials, they are
reluctant to establish strict time frames for issuing notices and orders
because the complexity of applications can vary substantially.
Nonetheless, the Inspector General's recommendation, if implemented, could
help better manage how SEC processes applications while ensuring that the
agency has flexibility to devote adequate time to reviewing novel
applications.
27See Comments and Request for Hearing of Harbert Distressed Investment
Fund, LTD. Regarding Form U-1 and Declaration of Allegheny Energy Under
the Public Utility Holding Company Act of 1935, File Nos. 70-10251 and
70-10100 (Feb. 18, 2005).
28Allegheny Energy, Inc., et al., Holding Co. Release No. 27963 (Apr. 29,
2005).
29U.S. Securities and Exchange Commission, "Regulation of Public Utility
Holding Companies" (Audit 372). Oct. 20, 2003.
Page 23 GAO-05-617 Public Utility Holding Company Act
Nevertheless, SEC improved its timeliness in issuing some orders in fiscal
year 2004. For example, as shown in figure 7, SEC issued orders in
response to almost 36 percent of the applications it received in fiscal
year 2004 within 3 months, compared with 22 percent in fiscal year 2003.
However, some applications may remain pending for much longer periods of
time. SEC officials told us that the amount of time needed to issue
notices and orders can vary widely, depending on the complexity and
completeness of the original application. Further, some applications
remain pending for long periods of time because the companies do not
formally withdraw applications for transactions that they do not plan to
consummate.
Figure 7: Time Elapsed between PUHCA Applications Submitted in Fiscal
Years 2003 and 2004 and the Issuance of Related Orders
Source: SEC.
Note: As of December 20, 2004.
Industry participants and SEC staff attributed SEC's slowness in
processing applications to both inadequate staffing levels and multiple
layers of internal review. For example, 5 of the 13 registered companies
we spoke with indicated that SEC's staffing levels are less than adequate
to administer PUHCA. Many industry participants noted that the recent
increase in the number of registered companies has strained existing staff
resources and could result in delays in processing applications. SEC's
Inspector General reported in 2003 that staffing resources were inadequate
to handle current workloads, resulting in insufficient time for rulemaking
Exempt Company Oversight Has Been Limited, but Recent SEC Actions Are Designed
to Strengthen It
and monitoring exempt companies.30 SEC has recently taken steps to
increase staffing levels in the Office of Public Utility Regulation by
granting staff authority to hire three new employees. However, the two new
staff members that have been hired so far were assigned to the Branch of
Auditing and Financial Analysis, which assists in processing applications,
but does not have primary responsibility for them. In addition, 14 of the
20 staff attorneys and accountants we spoke with observed that the lengthy
processing times might be due to the multiple levels of internal review by
senior agency officials. Although these layers of review could help ensure
consistency in SEC's notices and orders, which is an important agency
criterion, they frequently cause bottlenecks. Some staff also attributed
processing delays to companies submitting incomplete applications or not
providing SEC with additional information in a timely manner.
SEC has not systematically monitored the activities and exempt status of
all holding companies that are exempt from PUHCA. However, SEC is taking
steps to improve its oversight of exempt companies. In 2004, SEC staff
conducted a review of all 81 holding companies claiming exemption from
PUHCA by self-certification. According to SEC officials, further action
may be taken as a result of this review, including steps that could lead
to the revocation of some claimed exemptions. Despite this effort, SEC's
review did not include all of the approximately 50 holding companies that
are exempt by order because these companies are not generally required to
provide periodic information to SEC about their utility activities. In
fact, SEC cannot reliably estimate how many companies that have received
exemptive orders continue to be entitled to such exemptions. For example,
while officials estimate that 50 holding companies are exempt by order,
this figure does not include holding companies that received exemptive
orders because they are only incidentally or temporarily holding
companies. As time and resources permit, SEC staff plans to continue its
efforts to better monitor whether exempt companies remain eligible for
exemption, but has not established how it plans to implement these
improvements. In addition to conducting another review of all companies
claiming exemption by self-certification, SEC staff plans to develop
recommendations for improvements to the self-certification form that these
holding companies file.
30U.S. Securities and Exchange Commission, "Regulation of Public Utility
Holding Companies" (Audit 372). October 20, 2003.
Page 25 GAO-05-617 Public Utility Holding Company Act
SEC Only Recently Conducted a Review of Exempt Companies but Not Those
Exempt by Order
While PUHCA provides SEC with broad authority to question and revoke the
exemptions of holding companies that may be improperly claiming them, SEC
has not undertaken a review of all holding companies that are exempt from
PUHCA. As a result, the agency cannot ensure that all companies that have
an exemption from PUHCA continue to qualify for an exemption and do not
need to be subject to SEC's regulation under PUHCA. According to SEC
officials, staff conducted reviews of the self-certification forms-called
Form U-3A-2s-of holding companies that annually self-certify for exemption
from PUHCA in 1998, 1999, and 2002. However, unlike the 2004 review, SEC
could only devote limited resources in previous years to conducting these
reviews. Moreover, in a 2003 report, the SEC Inspector General found that
SEC does not generally review Form U-3A-2s to determine whether holding
companies that self-certified for exemption continue to qualify for their
exemption.31
SEC has recently improved how it oversees exempt holding companies.
According to SEC officials, in 2004, a team of six SEC staff attorneys
reviewed the Form U-3A-2s of all 81 holding companies that claim exemption
from PUHCA by annual self-certification using a set of instructions on how
to review the form. The instructions included a checklist to assist the
attorneys in analyzing revenue information for the holding companies and
their utility subsidiaries. The analysis of revenue information is a
factor in determining whether a company can claim an exemption. According
to SEC officials, as a result of this review, further steps may be taken,
including steps that could lead to the revocation of some claimed
exemptions.32 SEC staff undertook this review, in part, as a result of a
recent Commission decision that denied Enron Corporation's applications
for exemption from PUHCA. This decision helped clarify the criteria that
holding companies must meet to engage in out-of-state wholesale energy
sales through their utility subsidiaries and be eligible for exemption
from the act.33 SEC officials told us that this decision had forced
31U.S. Securities and Exchange Commission, "Regulation of Public Utility
Holding Companies" (Audit 372), Oct. 20, 2003.
32Under Rule 6, the Commission can take steps to revoke a company's exempt
status if it determines that questions exist as to whether the exempt
company continues to qualify for the exemption. 17 C.F.R. S: 250.6.
33See In the Matters of the Applications of Enron Corporation, Holding Co.
Act Release No. 27782 (Dec. 29, 2003).
SEC Increases Focus on Monitoring Exempt Companies
at least two exempt companies whose utility subsidiaries sell wholesale
energy to reconsider their exemptions.
Staff did not evaluate whether companies that are exempt by order continue
to qualify for an exemption as part of its 2004 review. In fact, SEC has
no formal process to ensure that these companies still qualify for their
exemption and, therefore, are not subject to SEC oversight because they
are not required to provide SEC with periodic information showing that the
circumstances that gave rise to their exemptions continue to exist. In
addition, SEC cannot provide reliable estimates of the number of companies
that have received exemptive orders that continue to meet the statutory
definition of a holding company. For example, officials estimate that 131
holding companies are exempt from PUHCA, of which 50 companies are exempt
by order. However, these figures do not include holding companies that
received exemptive orders because they are only incidentally or
temporarily holding companies.34 According to SEC officials, the agency
exempted many companies from PUHCA that were only incidentally or
temporarily holding companies in the 1930s and 1940s. However, because
these companies do not regularly provide SEC with information about their
utility activities, SEC may not know whether they still operate as holding
companies or are still eligible for an exemption. SEC officials recognize
this deficiency and plan to evaluate the different legal options for
compelling companies that are exempt by order to provide SEC with
additional information.
As time and resources permit, SEC plans to continue to take steps to
improve its oversight of exempt companies. For example, SEC staff is
currently reviewing the Form U-3A-2s that companies submitted in 2005,
similar to its 2004 review. With the recent hiring of new staff, SEC has
developed plans to better monitor the activities of exempt companies by
regularly reviewing their credit ratings and public filings. While agency
officials told us that they would like to formally review Form U-3A-2s as
frequently as possible, they acknowledged that the demands of other office
responsibilities limit them from conducting reviews of Form U-3A-2s
annually. Also, the factors that SEC evaluates when reviewing
self-certified exemptions may not change significantly from year-to-year.
34Under Sections 3(a)(3) and 3(a)(4), a company that is only incidentally
or temporarily a holding company is eligible for an exemption. 15 U.S.C.
S:79c(a)(3)-(4).
Page 27 GAO-05-617 Public Utility Holding Company Act
SEC Conducts Analysis and Discussions When Considering PUHCA No-Action
Requests, Similar to Processes in Other Government Entities
In addition, SEC officials have indicated that they plan to recommend a
number of changes to Form U-3A-2 that could allow it to serve a more
useful regulatory purpose. In 2003, the SEC Inspector General found that
this form is outdated and does not request the information necessary for
SEC to determine whether a holding company should be exempt.35 For
example, the form requires holding companies and their subsidiary
utilities to quantify their out-of-state electricity and natural gas
transactions in terms of kilowatt hours and cubic feet, but not dollars.
However, SEC has primarily looked at the revenue that these companies
derive from out-of-state transactions when evaluating whether holding
companies are predominantly intrastate. Because Form U-3A-2 does not
directly require the submission of revenue data, SEC staff may have to
obtain such data from other forms or ask the companies for it directly.
SEC officials told us that they are aware of existing deficiencies with
Form U-3A-2 and that they plan to develop a series of recommendations to
the Commission for changes to the form that they would like to implement
before the end of this year.
SEC staff conducts legal analyses and engages in internal discussions
before responding to requests for no-action relief from PUHCA. In
addition, staff frequently corresponds with counsel for the requesting
entities to help them revise their requests. This process is similar to
processes used in other SEC offices and another federal government agency
that issue no-action letters.
Staff Conducts Legal Based on our review of the workpaper files of 10 of
the 15 companies that obtained PUHCA no-action letters between 2001 and
2004, we found that
Analysis and Engages in
Internal and External SEC staff reviews the legal analyses offered in the
no-action request and Discussions engages in internal discussions about
whether to grant no-action relief to
35U.S. Securities and Exchange Commission, "Regulation of Public Utility
Holding Companies" (Audit 372), Oct. 20, 2003.
Page 28 GAO-05-617 Public Utility Holding Company Act
Staff's Process for Responding to PUHCA No-Action Letter Requests Is Similar
to Processes in Other SEC Offices and CFTC
the requester.36 The legal analysis consists of staff examining the facts
of the proposed transaction and conducting legal research to determine if
the proposed transaction is allowable under the act. In addition, the
staff discusses the facts and the legal research with other staff involved
in reviewing the request. The staff also corresponds regularly with
counsel for the requesting entities to help them focus and clarify their
requests. In response to the staff's concerns, requesting entities
generally submit multiple draft requests before staff is willing to issue
a no-action letter. However, if the staff determines that it is not
appropriate to issue a no-action letter in response to a request, the
staff will then give the outside counsel an opportunity to withdraw the
request, which counsel generally does.37 SEC estimated that outside
counsel withdraws approximately two PUHCA no-action letter requests each
year. Nevertheless, SEC officials told us they were not aware of an
instance in which the Commission had ever overturned a staff assurance
contained in a no-action letter.
SEC's process for responding to PUHCA no-action requests is similar to
no-action letter processes in two other SEC offices and CFTC, the federal
agency responsible for the regulation of commodity and financial futures
and options.38 Staff from these three entities also reviews no-action
requests internally, performs legal analyses, and often engages in
substantial discussions with the requesting entities to help them focus or
revise their requests, before issuing a no-action letter or,
alternatively, asking that they withdraw their request.
SEC issues relatively few PUHCA no-action letters compared with CFTC and
another SEC office. For example, between 2001 and 2004, SEC staff issued
an average of fewer than 4 PUHCA no-action letters per year. By contrast,
CFTC issued an average of 21 no-action letters per year between 2001 and
2004 and the Office of the Chief Counsel in SEC's Division of
36As with PUHCA orders, SEC will not issue PUHCA no-action letters until
other regulators, such as FERC or the relevant state utility commission,
have approved the transaction, if such approval is necessary.
37However, we did identify one instance in which the staff issued a
written denial of no-action relief from PUHCA. See Kaufman and Broad,
Inc., SEC No-Action Letter, 1985 LEXIS 2344 (May 16, 1985).
38In addition to CFTC, we compared SEC's process for issuing PUHCA
no-action letters with processes within SEC's Office of the Chief Counsel
in the Division of Investment Management and SEC's Office of the Chief
Counsel in the Division of Corporation Finance.
SEC Evaluates Controlling Influence on an Individual Basis, but No-Action
Letters Reflect an Expanding List of Allowable Consent Rights
Corporation Finance told us it issued over 600 no-action letters in fiscal
year 2004, of which 444 were for requests to exclude shareholder proposals
from proxy statements. Staff attorneys are responsible for reviewing
no-action letters at CFTC and in SEC's Office of the Chief Counsel within
the Division of Corporation Finance. However, according to SEC officials,
generally only senior SEC staff handles PUHCA no-action requests.
SEC has historically evaluated investments by entities that raise concerns
about controlling influence on an individual basis. In making these
decisions, SEC has paid particular attention to the relationship between
the holding company and the public utility, the potential for excessive
charges to the utility through intercompany contracts, and the adequacy of
regulatory oversight over the holding company and its public utility
subsidiaries. To date, SEC has never formally declared an investor that
owns less than 10 percent of the voting securities of a public utility or
holding company to be a holding company. However, in the absence of formal
Commission precedent, SEC staff has issued a series of no-action letters
to entities seeking to acquire less than 10 percent of the voting
securities of such companies.39 In addition, over the past several years,
SEC staff has granted no-action relief to investors that have proposed to
exercise an increasing number of consent rights over certain operational
matters of the invested entities. While some interested parties have
indicated that SEC should clarify which consent rights would cause an
investor to exercise such a controlling influence so as to necessitate
regulation of the investor as a holding company under PUHCA, one SEC
official told us that clearer guidance on this issue may not prevent
investors from structuring future investments with new or different
combinations of consent rights. However, general guidelines about minimum
standards that an investor must satisfy for the staff to issue a no-action
letter may help clarify how the staff interprets controlling influence.
39Investors would seek these letters because PUHCA requires holding
companies to seek an exemption or register under the act.
Page 30 GAO-05-617 Public Utility Holding Company Act
SEC Evaluates Controlling Influence on a Case-by-Case Basis
In past decisions, SEC has found that the presence of controlling
influence needs to be evaluated on an individual basis and that the
specific circumstances surrounding an investment need to be considered.40
In making its decisions, SEC has focused on the past and current
relationship between the holding company and the public utility, the
nature of intercompany contracts, and whether investors and consumers will
be subject to adequate regulatory oversight.41 However, SEC has only ruled
on controlling influence when considering applications from companies
presumed to be holding companies by virtue of their 10 percent ownership
that are seeking declarations that they are not holding companies. By
contrast, PUHCA presumes that investors that own less than 10 percent of
the voting securities of a public utility or holding company are not
holding companies unless SEC determines that it is necessary or
appropriate in the public interest or for the protection of consumers or
investors to regulate the investor as a holding company. To date, SEC has
not made such a determination. Therefore, SEC has no established precedent
with respect to factors that have led SEC to conclude that a less than 10
percent investor exercised such a controlling influence over a holding
company or public utility that it was necessary to subject the investor to
the requirements of PUHCA.
Instead, companies with less than 10 percent of the voting securities of a
public utility or holding company have sought no-action relief that they
would not be considered holding companies under PUHCA. Since 1986, SEC
staff has issued a series of no-action letters to entities seeking
assurances that ownership of less than 10 percent of the voting securities
of a holding company would not cause them to be holding companies
themselves within the meaning of the act. These no-action letters have
involved investors that have sought to acquire substantial interests in
holding companies through limited partnership interests or nonvoting
40 See American Gas & Electric Co. v. SEC, 134 F.2d 633, 642 (D.C. Cir.
1943).
41See, for example, Koppers United Co. v. SEC, 138 F.2d 577 (D.C. Cir.
1943); Hartford Gas Co. v. SEC, 129 F.2d 794 (2nd Cir. 1942); Detroit
Edison Co. v. SEC, 119 F.2d 730 (6th Cir. 1941); H.M. Byllesby & Co., 6
S.E.C. 639 (1940); Allied Chemical & Dye, 5 S.E.C. 151 (1939); West Penn
Railways, 2 S.E.C. 992 (1937).
Page 31 GAO-05-617 Public Utility Holding Company Act
SEC No-Action Letters Have Allowed a Growing List of Consent Rights
preferred stock.42 However, to avoid coming within the definition of a
holding company and thereby risk having to divest many of its nonutility
investments, the investor will acquire less than a 10 percent interest in
the voting securities of the holding company. To protect their
investments, these investors will also acquire certain consent rights over
the operations of the invested entities. These rights may include the
power to approve security issuances and capital expenditures in excess of
budgeted amounts, among others. In considering these requests, staff must
determine whether these consent rights would enable the investor to vote
in the direction or management of the affairs of such companies or cause
an investor to exercise a controlling influence over the management and
policies of a public utility or holding company.
In recent years, SEC staff has granted no-action assurances to investors
that have proposed to exercise an increasing number of consent rights over
their invested entities. The growth in the number and range of these
consent rights has raised concerns by some parties that staff may be
exercising too much discretion in determining whether controlling
influence is present. The following example illustrates how SEC staff has
granted no-action letters to investors that have proposed to exercise more
substantial consent rights over operational matters. In a no-action letter
from 1986, staff granted relief to two investors that proposed only the
right to approve the admission of new partners into the limited
partnership and to continue the limited partnership in the event of
bankruptcy or withdrawal of the general partner.43 By comparison, staff
has recently granted no-action assurances in circumstances in which a
single investor
42See, for example, General Electric Capital Corp., SEC No-Action Letter,
2002 WL 837537 (Apr. 26, 2002); Berkshire Hathaway Inc., et al., SEC
No-Action Letter, 2000 WL 294900 (Mar. 10, 2000); Nevada Sun-Peak Limited
Partnership, SEC No-Action Letter, 1991 WL 178782 (May 14, 19991);
Colstrip Energy Limited Partnership, SEC No-Action Letter, 1988 WL 234462
(Apr. 25, 1988). A limited partnership is a business structure that allows
one or more partners to enjoy limited personal liability for partnership
debts while another partner or partners (called general partners ) have
unlimited personal liability. The general partner manages the day-to-day
operations of the partnership.
43See John Hancock Mutual Life Insurance, SEC No-Action Letter, 1986 LEXIS
2559 (Jul. 23, 1986). In granting no-action relief, the staff concurred
with the opinon of the investors' legal counsel that the investors, who
owned an aggregate of 37.5 percent of the limited partnership, were merely
passive investors and, as limited partners, were prohibited by both the
partnership agreement and applicable state law from participating in the
management or control of the partnership's business. The initial
partnership proposed to acquire and operate a hydroelectric facility and
thus became a public utility company.
Conclusions
could essentially veto proposed sales of significant businesses or assets
of the operating utility, employment contracts with utility executives,
changes to the holding company's annual operating budgets, votes of the
holding company's ownership interests in the utility subsidiary, and
issuances of additional securities by the holding company.44
Some interested parties have expressed concern about the number of consent
rights that utility investors have acquired and have indicated that SEC
should more clearly specify which consent rights would cause a utility
investor to exercise a controlling influence. SEC staff observed that more
explicit guidance on consent rights may not prevent similar investments in
the future because in theory an infinite number and combination of consent
rights exist that would allow an investor to exercise more or less control
over an invested entity. If SEC specified that certain consent rights
would cause an investor to exert a controlling influence and, therefore,
be a holding company within the meaning of the act, subsequent investors
in public utilities or holding companies may propose new or different
combinations of consent rights over invested entities when they structure
future transactions to avoid exercising a controlling influence. Thus a
list of specific consent rights that would cause a utility investor to
exercise a controlling influence may not address all possible combinations
of consent rights. However, it may be appropriate for SEC to issue general
guidelines setting forth minimum standards that utility investors must
satisfy for the staff to find that they do not exercise a controlling
influence over the management and policies of public utilities or holding
companies. These guidelines could help clarify for the staff as to when it
is appropriate to issue a no-action letter and for the industry on how SEC
staff determines whether controlling influence is present.
In administering PUHCA, SEC is charged with the difficult task of
regulating a rapidly changing industry. Within the past decade, SEC has
said that a flexible approach to administering the act is necessary to
protect consumers and investors in this changing environment. Accordingly,
SEC has approved a series of mergers between geographically-dispersed
utility systems; it removed some restrictions on holding companies'
diversification into some nonutility activities; and it issued no-action
letters to utility investors that have proposed to acquire a growing list
of consent
44See, for example, General Electric Capital Corp., supra note 42;
Berkshire Hathaway Inc., supra note 42.
Page 33 GAO-05-617 Public Utility Holding Company Act
rights over operational decisions of public utilities and holding
companies. However, it is unclear whether or how these collective
decisions and actions have served the interests of utility consumers and
investors. With this continuing uncertainty, it may be appropriate for SEC
to conduct a study, in collaboration with other knowledgeable parties, to
re-examine the collective impact of its recent decisions and actions in
administering PUHCA on consumers, investors, and the public interest.
Regardless of the debate on SEC's interpretations of the act, there are
steps that SEC can take to better manage the processes involved in
administering the act. SEC devotes most of its available resources for
administering PUHCA to handling applications from registered holding
companies and has struggled to devote adequate resources to other
responsibilities such as rulemaking, reviewing incoming PUHCA filings, and
monitoring exempt companies. Consequently, SEC continues to administer the
act with ineffective forms and without a comprehensive system to collect
data and monitor the activities of both registered and exempt holding
companies. Although SEC staff is aware of outdated forms and regulations
that need revisions, it can only undertake planned initiatives as time and
resources permit. Developing a formal strategy that prioritizes forms and
regulations to be revised and establishes time frames for their referral
to the Commission would improve the likelihood of timely completion of
high priority initiatives. Further, systematically analyzing data from
registrant filings could provide another tool for SEC staff to oversee
registered companies. Despite the fact that many industry participants
perceive that SEC processes PUHCA applications slowly, the staff has not
implemented suggestions that it establish time frames for issuing notices
and orders. Moreover, since most of today's holding companies are exempt
from SEC's oversight under PUHCA, it is important that SEC monitor the
activities of exempt companies and determine whether the continuation of
exempt status for all exempt companies is in the best interest of the
public, investors, and consumers. Finally, because the staff has granted
no-action assurances to utility investors that are acquiring a growing
number of consent rights over operational matters of holding companies and
public utilities, clearer SEC guidance on the minimum standards that a
corporate structure must satisfy may help inform the staff's determination
about when a no-action letter is appropriate and clarify to investors
which types of investment structures would cause them to be holding
companies within the meaning of the act.
Recommendations for Executive Action
As long as SEC continues to have the responsibility to administer PUHCA,
we recommend that the Chairman, SEC, take the following two actions to
improve the timeliness and quality of SEC's activities related to its
oversight of registered holding companies:
o Implement the SEC Inspector General's recommendation for establishing
time frames and target dates for assigning, reviewing, and issuing
notices and orders on a case-by-case basis.
* Develop an action plan to establish and meet time frames for
making improvements to existing PUHCA forms and developing a
system to collect and analyze information contained in PUHCA
filings to enhance SEC's ability to better monitor registered
holding companies, while reducing the overall regulatory burden
on these companies.
* Although SEC has recently conducted a review of all companies
exempt by self-certification, we recommend that the Chairman,
SEC, further enhance SEC's monitoring of exempt companies by
taking the following two steps:
o Expedite the evaluation of the different legal options and obtain the
necessary legal authority for requiring companies that are exempt by
order to provide additional information on their operations.
* Create a formal strategy to conduct comprehensive reviews of
companies claiming exemptions on a periodic basis and expand the
focus of these reviews to include companies that claim exemption
by order.
* In light of the growing number of consent rights that utility
investors have acquired over operational matters of holding
companies and public utilities, we recommend that the Chairman,
SEC:
o Develop and publish general guidelines that articulate minimum
standards that an investor seeking to acquire an interest in a holding
company or public utility must satisfy in order to receive a no-action
letter. Examples of these minimum standards could include that a
majority of the members of the public utility's or holding company's
board of directors not be affiliated with the investor or that any
consent rights be limited to those necessary to protect the investor
from unilateral action by a majority investor.
Agency Comments and Our Evaluation
Finally, given the changes that are taking place in the utility industry
and current debates about SEC's actions in administering PUHCA, including
the agency's interpretations of the single area requirement and its
interpretations of a controlling influence, we recommend that the
Chairman, SEC:
o Conduct a study on the impact of SEC's administration of PUHCA in the
last decade and, if necessary, make legislative proposals. The study
should examine whether its decisions and flexible interpretations
facilitate consumer and investor protection and enable companies to
provide energy to the nation's consumers in an efficient and competitive
manner. In conducting this study, SEC should gather the views of the
utility industry, consumer groups, trade associations, investment banks,
rating agencies, economists, and relevant state and federal regulators.
SEC provided written comments on a draft of this report that are reprinted
in appendix II. SEC also provided technical comments, which were
incorporated into the final report, as appropriate. SEC agreed with some
of our recommendations but did not address others. SEC commented on the
need to interpret PUHCA in a manner that reflects the changes in the
utility industry without creating unnecessary risks for investors or
utility customers. SEC did not specifically address the need to provide
guidance on consent rights but agreed that there are areas in which the
agency can offer further guidance and, in appropriate circumstances,
reexamine prior interpretations of the act.
SEC agreed that it is important to continue to monitor the status of all
exempt companies and particularly to monitor those companies' continuing
entitlement to exemptions. However, SEC did not address the need for the
creation of a formal strategy, but noted that staff is involved in an
ongoing project to review and, where necessary, improve their ability to
monitor the activities of all exempt holding companies.
SEC agreed that updating some of the forms that holding companies are
required to file would make it more efficient for SEC to obtain the
information necessary to regulate holding companies and also reduce the
unnecessary burdens on these companies by eliminating duplicative or
unneeded filing requirements. To this end, SEC staff will continue to make
recommendations for updating the forms as necessary. However, SEC did not
address the need to establish an action plan for such improvements. SEC
also did not directly address our recommendation on establishing time
frames and target dates for reviewing and issuing notices and orders. We
continue to believe that establishing such time frames would be beneficial
for SEC's oversight of registered holding companies by improving the
timeliness of the agency's activities.
Finally, SEC noted that the agency informally assesses its administration
of PUCHA on a regular basis but agreed to seriously consider the
possibility of doing a formal study.
As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies of this report to the
Chairman, House Committee on Energy and Commerce and other interested
Members of Congress. We also will send copies to the Chairman of SEC and
will make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact
me at (202) 512-8678 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff that made major contributions to this report are
listed in appendix III.
Yvonne D. Jones
Director, Financial Markets and Community Investment Appendix I
Objectives, Scope, and Methodology
Our objectives were to determine (1) the nature and extent to which the
Securities and Exchange Commission (SEC) regulates registered holding
companies, (2) the extent to which SEC reviews claims of exemption- filed
as either self-certifications or applications for SEC order-from the act,
(3) SEC's process for issuing Public Utility Holding Company Act of 1935
(PUHCA) no-action letters, and (4) how SEC determines whether companies
have a controlling influence over public utilities or holding companies.
However, as agreed with our requesters' staff, we did not evaluate the
arguments for or against PUHCA's repeal.
To determine the nature and extent to which SEC regulates registered
holding companies, we used a number of methodologies, including reviews of
publicly available documents, structured and open-ended interviews, data
analysis, and workpaper reviews. For example, we reviewed PUHCA, SEC's
associated regulations, and other publicly available documents to
understand the various statutory and regulatory provisions that govern
SEC's responsibilities. We followed topical issues that affect SEC's work
by reviewing applications that were pending, as of December 2004, and
recently issued orders available through SEC's Web site, as well as
industry press reports. We also attended and obtained documents filed as
part of SEC's 2005 administrative procedure involving the American
Electric Power and Central and Southwest Corporation merger to monitor
developments in that hearing.
Also, we conducted a series of interviews with SEC officials to understand
and seek clarification on key points about how SEC regulates registered
companies and topical issues involving registered companies. We asked
utility experts and interested industry groups, including a past SEC
official, the head of a PUHCA working group, the American Public Power
Association, the National Rural Electric Cooperative Association, the
Edison Electric Institute, the National Association of Regulatory Utility
Commissioners, and Public Citizen for their views on SEC's administration
of the act. We spoke with officials from other regulatory bodies,
including the Federal Energy Regulatory Commission (FERC), SEC's Division
of Corporation Finance, and representatives from four state utility
commissions about the extent of their coordination with SEC on issues
pertaining to PUHCA. We met with officials from the three major credit
rating agencies and other Wall Street officials about the effect of SEC's
administration of PUHCA on the financial health of public utilities and
holding companies. We also spoke with an official from SEC's Office of the
Inspector General to better understand the methodologies used and
Appendix I Objectives, Scope, and Methodology
findings presented in a recent Inspector General audit on the regulation
of holding companies.
In addition, we conducted structured interviews with officials from a
random selection of 13 of the 31 registered holding companies to solicit
registrants' opinions about their regulator. We also conducted structured
interviews with all 20 SEC staff attorneys and accountants with more than
6 months of on-the-job experience working on PUHCA to obtain their
opinions about SEC's internal processes and procedures.
Furthermore, we reviewed SEC workpapers from two recent examinations to
better understand SEC's processes and procedures for examining
registrants. We then obtained and analyzed SEC data on consumer cost
savings as a result of its examination program. In addition, we obtained
and analyzed SEC data on the amount of time that has elapsed between the
submission of PUHCA applications in fiscal years 2003 and 2004 and the
issuance of related notices and orders to evaluate how quickly SEC
processes applications.
To assess the extent to which SEC reviews claims of exemption from the
act, we relied on structured and unstructured interviews and reviews of
both publicly available documents and information collected from SEC. For
example, we reviewed Section 3 of the act, which describes the statutory
provisions under which SEC can exempt-and revoke the exemptions of-holding
companies from PUHCA, as well as Rules 2 through 6, which implement the
act's exemptive provisions. We also reviewed the administrative law
judge's and the Commission's decisions In the Matter of the Applications
of Enron Corp., documentation of SEC's policy for reviewing Form U-3A-2s
in 2004, and publicly available documents that discuss SEC's procedures
and policies for reviewing claims of exemption to gain an understanding of
the criteria that SEC uses to evaluate Section 3(a)(1) exemptions. We
obtained and analyzed data from SEC on the number of exempt holding
companies. We also obtained and analyzed a blank Form U-3A-2 from SEC's
Web site to determine whether that form collects adequate information for
SEC to monitor companies claiming exemption under Rule 2.
We spoke with SEC officials to understand SEC's process for reviewing Form
U-3A-2s in 2004 and to get clarification on key points, such as the reason
that some applications for exemptive orders are currently pending. As part
of our structured interviews with 13 registered holding companies and 20
SEC staff attorneys and accountants, we inquired about their
Appendix I Objectives, Scope, and Methodology
opinions of SEC's processes for reviewing exemptions. We also spoke with
FERC and state utility commissions to determine how SEC coordinates with
other regulatory bodies in reviewing exemptions. As necessary, we spoke
with other knowledgeable subject matter experts and industry groups about
how SEC reviews claims of exemption to solicit the opinions of third
parties.
To determine SEC's process for issuing PUHCA no-action letters, we spoke
with a variety of government officials both inside and outside SEC. After
speaking with SEC officials to understand SEC's process for issuing PUHCA
no-action letters, we selected three other entities, both within and
outside of SEC, that regularly issue no-action letters against which we
could compare SEC's no-action letter process under PUHCA. These entities
were the Office of the Chief Counsel within SEC's Division of Investment
Management, the Office of the Chief Counsel within SEC's Division of
Corporation Finance, and the Commodity Futures Trading Commission (CFTC).
We then spoke with knowledgeable officials from each entity to understand
their processes for issuing no-action letters. We also spoke with
officials from the Federal Communications Commission and FERC about any
comparable procedures at those agencies. However, officials at those two
agencies were not aware of any no-action letters that they issue. In
addition, we spoke with an official from SEC's Office of the Inspector
General to better understand the methodologies used and findings presented
in a recent Inspector General audit on the Division of Investment
Management's no-action letters.
Further, we conducted structured interviews with representatives from a
randomly selected sample of 6 of the 15 companies that have received PUHCA
no-action letters between 2001 and the present to learn about their
experiences in seeking no-action relief through SEC. In addition, we
reviewed several no-action letters issued since 2001, all of which are
available on SEC's Web site, and obtained and analyzed SEC workpaper files
from 10 no-action letters issued between 2001 and 2004 to assess the
amount and types of interaction that occur between the requesting entity
and SEC staff prior to the issuance of a final letter. We also reviewed
publicly available documents about no-action letters, including SEC
releases and CFTC regulations, to gain an understanding of the criteria
that agencies use when processing no-action letter requests.
To asses how SEC determines whether companies have a controlling influence
over public utilities or holding companies, we performed a legal analysis
of publicly available documents, including Section 2 of PUHCA,
Appendix I Objectives, Scope, and Methodology
past SEC orders and no-action letters related to controlling influence,
and the Division Investment Management's responses to inquiries from the
House Energy and Commerce Committee about SEC's administration of PUHCA.
We also spoke with SEC officials to gain a more thorough understanding of
the staff's interpretation of this provision of the act.
We conducted our work in Washington, D.C., and New York, N.Y., from August
2004 to June 2005 in accordance with generally accepted government
auditing standards.
Appendix II
Comments from the Securities and Exchange Commission
Appendix II Comments from the Securities and Exchange Commission
Appendix III
GAO Contact and Staff Acknowledgments
Yvonne D. Jones (202) 512-8678
GAO Contact
In addition to the individual named above, Jon Altshul, Marc Molino,
Staff
Omyra Ramsingh, LaSonya Roberts, and Karen Tremba made key contributions
to this report.
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