Good morning Chairman Enzi and members of the Subcommittee. I am Charlie Acquard, executive director of the National Association of State Utility Consumer Advocates (NASUCA). NASUCA is an association of 41 consumer advocate offices in 38 states and the District of Columbia. Our members are designated by laws of their respective states to represent the interests of utility consumers before state and federal regulators and in the courts. On behalf of the members of NASUCA, I wish to thank you for the opportunity to testify before this Committee on the Public Utility Holding Company Act of 1935.
First I would like to commend the Committee for holding this hearing. As more states consider, implement (or reject), and reassess a move toward a more competitive electric generation industry, it is essential that federal and state lawmakers continue to review those laws and regulatory actions that will either protect or harm consumer interests in the context of the larger debate on the structure of the industry.
The question before this committee today is on the future of the Public Utility Holding Company Act. Yet, this issue cannot be examined outside the context of the entire framework of the electric utility industry without considering the market implications for consumers and competitors alike. No one has to tell this committee that the electric utility industry is in the midst of substantial change, uncertainty, and, in some places, turmoil. It is a front page, six o’clock lead news story. Anybody involved with this industry cannot escape the over-the-backyard-fence or soccer-sideline inquires from concerned neighbors about the possibility of what’s going on out there happening here. So examination or possible elimination of key industry underpinnings cannot be done in a vacuum or viewed through the narrow prism of simply securities regulation. Rather, any discussion of substantial alteration of PUHCA must be considered in the context of the potential impact on industry structure, market power, and, ultimately, consumers.
In a series of resolutions dating back almost 20 years, NASUCA has urged Congress to exercise the greatest caution in response to efforts to dismantle the consumer protections contained in PUHCA. Specifically, NASUCA continues to oppose changes to PUHCA that would reduce consumer protections in the Act at this time. NASUCA urges Congress and the SEC not to take any action that would weaken the Act without first ensuring that public utility holding companies are either subject to effective competition or subject to effective regulation, where effective competition does not yet exist or where competition would not induce efficiency, reduce costs and advance consumer interests.
Our resolutions recognize that public utility holding companies and their subsidiaries are affected with a national public interest and that their activities extending over many states are not susceptible to effective control by any individual state. We also recognize that neither the electric industry nor the natural gas industry has a fully competitive market structure and that utility market power remains pervasive. We conclude that, if PUHCA were repealed today in the manner proposed in S. 206, neither the remaining regulatory scheme nor the current state of competition would be sufficient to protect consumers. Until utility market power is eliminated, consumers must be protected by effective regulation, which includes the provisions of PUHCA.
In NASUCA’s view, effective regulation of multi-state public utility holding companies requires both rate reviews and structural reviews, with a rational allocation of responsibility between state and federal decision-makers.
NASUCA recognizes that effective competition benefits consumers through greater efficiency and reduced costs. We also note, however, that deregulation under conditions of unfettered market power harms consumers. As such, our resolutions doe not suggest that PUHCA must remain in its current form indefinitely. Rather, it cautions Congress and the SEC to take no action to weaken PUHCA without first ensuring that either effective competition or effective regulation is in place to protect consumers.
Our concerns are not held alone. In fact, every consumer group that I am aware of is opposed to repeal of the Act if not accompanied by effective provisions to promote sustainable, competitive markets. I have attached a list of groups who have been on record opposing PUHCA repeal.
The legislation before us does not adequately address the concerns of consumer advocates across the nation. Moreover, S. 206 would significantly worsen the problems associated with monopoly power. For example:
2. With repeal or easing of restrictions on utility diversification, the complexity of tracking and allocating costs and preventing cross- subsidization reaches a new level of difficulty. The goal of PUHCA modernization should be to reduce overly burdensome regulation. By repeal of PUHCA diversification provisions, S. 206 would have the opposite effect by increasing the regulatory burden.
3. There will be a significant increase in complex holding company structures. This would make it much more difficult to detect and deflect inappropriate interaffiliate transactions between competitive and monopoly business components, or to prevent conflicts of interest, anti-competitive behavior or other market power abuses.
4. As a result of their retail franchises and access to customers and information, electric utility holding companies retain an unmistakable advantage in many nonutility markets. Without addressing the fundamentals of this market power problem, S. 206 would permit utilities to harm competition in both utility and nonutility businesses. As a result, economic efficiency would be reduced, consumers harmed and small companies put out of business.
5. As evidenced in the SEC survey of state utility commissions complete a few years ago, many state regulators lack adequate authority to fill in regulatory gaps left by PUHCA repeal. Moreover, even if states have legal authority to fill the gaps, they may not have the resources, particularly as franchise owners become highly diversified and geographically distant, as S. 206 would permit.
While it is laudable that S. 206 includes a continued federal presence in policing interaffiliate transactions, audits and access to books and records, it falls short in providing all of the necessary tools to the FERC with respect to policing interaffiliate transactions. It even exempts key affiliates from having to provide access to books and records. Moreover, this legislation eliminates two provisions -- the provisions addressing diversification and the integration limitations -- which remain at the heart of the Act today despite the representations of some registered holding companies.
Proponents of repeal or major modification of PUHCA have incorrectly characterized the nature of the electricity industry today: It is not, as is claimed, a competitive industry. In fact, even in states the have restructured, little or no competition actually exists. Regulation, in the form of price caps and reductions, is the only tool that has resulted in lower prices for consumers. Furthermore, state regulation is not, contrary to repeal proponents, sufficient to protect consumers in the absence of a federal statute regulating multistate public utility holding companies.
The factor motivating Sam Rayburn in 1935 to take on the power trusts and push for enactment of PUHCA -- market power -- still exists in the 2001. Since 1935, the structure of the industry has been greatly influenced by the Act. Changes in PUHCA, without ensuring effective competition and effective regulation in those sectors where each (or both) is appropriate, will harm consumers.
Congress and federal agencies must address the need to mitigate market power. The exercise of market power is likely in industry structures that include natural monopolies over essential facilities such as transmission and distribution systems, or in joint ownership of monopoly and potentially competitive businesses. In the electricity industry today, these conditions remain. These conditions are not present in, for example, other industries, where there is no exclusive franchise to sell at retail.
If Congress repeals PUHCA and its integration requirement without tying relief to a showing of effective competition or divestiture, then these very large utility companies can expand their monopoly customer, billing, transmission and distribution monopolies at will to ward off competitors. This places such utilities at a tremendously unfair advantage prior to the onset of competition and will allow the utility to acquire other utilities and their service territories without facing competition within their own service territory or realistically be subject to acquisition by even larger competitors.
And, contrary to claims you may hear, PUHCA does not in any manner prevent or limit the ability of utilities to build generation. Wholesale generators – or EWGs – are specifically exempted from the act. So repeal of PUHCA will do nothing to alleviate the current energy crisis. In fact, repeal, as stated above, would only exacerbate monopoly power and manipulation of markets.
Where there are monopolies, especially with government-granted utility service franchises, the primary obligation is to core customers. No costs associated with an off-system investment, or with regulating such an investment to protect captive customers, should be borne by ratepayers. Unfortunately, effective means for denying the pass-through of unwarranted interaffiliate costs for multi-state holding companies do not always exist at the state level. In fact, the Mississippi Power and Light court decision (Mississippi Power and Light Co. ex rel Moore) places consumers at continued and expanded risk from harm as a result of inappropriate costs potentially being allocated by a federal agency even if the state has denied prudence of such costs. This may increasingly be the case as holding companies acquire disparate service territories. S. 206 does nothing to correct this regulatory gap. The very existence of such a regulatory gap will place consumers at risk.
Proponents of repeal argue that structural review is unnecessary because rate regulators can protect consumers. That is simply not the case. Rate review and structural review are complementary, and both are vital in ensuring fair rates and in preventing abuses. For example, PUHCA prevents holding companies from abusing corporate form to benefit their shareholders at the expense of consumers and competitors. They were designed as such when Congress enacted the twin Federal Power Act and PUHCA statutes. After-the-fact rate regulation alone cannot prevent or correct large investment errors, which may harm the ratepayers and the general public.
Secondly, state commissions do not have or may be prevented from using all the necessary tools to prevent harms to ratepayers and the public. For instance, the SEC/NARUC survey indicates that many states lack the legal authority to prevent certain out-of-state affiliations by a holding company located in another state, but owning the operating utility in the PUC’s jurisdiction. In addition to the Mississippi Power and Light decision, other gaps include Ohio Power v. FERC, 954 F.2d 779 (D.C. Cir), cert. denied, 113 S.Ct. 483 (1992). While S. 206 appears to address the Ohio Power gap prospectively, it does nothing to address the regulatory gap created by MP&L.
Finally, states may not be the only appropriate jurisdictions to decide when a particular acquisition of a distant utility creates too much market power or concentration of control. So, structural regulation of multi-state holding companies still requires a federal role in addressing interaffiliate transactions, acquisitions of nonutility subsidiaries, acquisitions of distant utility companies, and mergers. Given current flaws in the structure of electricity markets, these changes are too substantial to adopt without ensuring the appropriate mix of effective regulation and effective competition.
After all, it is PUHCA itself, with its structural protections and outright bans of certain actions, transactions and behaviors that cannot be replaced or matched by S.206 or other poor substitutes. Some parts of PUHCA still prevent anticompetitive and anti consumer behavior.
The Committee should take a closer look at who is for and against stand-alone PUHCA repeal. The primary proponents of repeal are most of the registered holding companies and the SEC. Opponents include the Consumers for Fair Competition, all major consumer groups, representing residential, commercial and industrial customers, heating and air conditioning contractors, municipal electric and cooperative organizations, the National Association of Regulatory Utility Commissioners, and many other organizations.
I would like to conclude by urging this Committee to consider any changes to the Public Utility Holding Company Act be done only in the context of the larger structure of the industry. As you have heard, the industry is evolving and that evolution has not been painless. We must first determine the appropriate market structure and nature of competition within the industry to evaluate the appropriate methods for balancing effective competition and effective regulation. If this is not achieved, consumers will not benefit, and will likely bear the brunt of any deregulatory actions.
NASUCA urges the Committee not to repeal or weaken the consumer protections in PUHCA as embodied in S. 206 or other legislation without first ensuring that public utilities are subject to effective competition, or effective regulation, where competition would not induce efficiency, reduce costs and advance the interest of consumers. Legislation such as S. 206 does not meet such a standard.
Such legislation is inappropriate. At both the state and federal levels throughout the nation, the structure of the electric and gas utility industries are being debated. However, it is still unclear what will be the outcome in many states. If we have learned anything from California, it is that the world is evolving in ways which we cannot anticipate the results. To repeal the anti-empire building statute at such a time when structural abuses could become the order of the day would be dangerous.
Thank you again for the opportunity to speak on behalf of NASUCA.
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