Subcommittee on Securities and Investment

Hearing on S.206 - "The Public Utilities Holding Company Act of 2001"

Introduction

Mr. Chairman, Members of the Subcommittee, my name is Dave Sparby, and I am the Vice President, Government and Regulatory Affairs of Xcel Energy, Inc. Xcel Energy is a holding company registered under the Public Utility Holding Company Act of 1935 ("PUHCA"). Xcel Energy was created as the result of a merger between Minneapolis-based Northern States Power (NSP) and Denver-based New Century Energies (NCE). The merger of those two companies was completed on August 17 of last year, some 17 months after it was announced. Xcel Energy serves more than 3 million electricity and 1.5 million natural gas customers in 12 states, and 2 million electricity customers internationally.

While I am speaking here today on behalf of Xcel Energy, I would note that we are also members of the Repeal PUHCA Now! Coalition, an ad hoc group of electric and gas utility systems, with public utility operations (collectively, the "Coalition"). We at Xcel, and the other members of the Coalition, would like to thank you very much for inviting us to submit testimony in favor of legislation repealing PUHCA.

As the Chairman and other members of the Subcommittee know, issues surrounding the relevance and efficacy of PUHCA, originally enacted in 1935, have been before the Congress almost continuously over the past twenty years. And while the statue has been amended in piecemeal fashion to respond to the changing dynamics of the energy industry, true reform has remained elusive. The legislation now before the Subcommittee, S. 206, offers the promise of such true reform and we support its speedy enactment. Indeed, legislation like S. 206 has been reported by the full Banking Committee , in identical or virtually identical form in each of the last two Congresses.

To be clear, we believe the case for enactment of S. 206 is strong. As articulated more eloquently in previous reports of the Committee and elsewhere:

• The purposes underlying the original requirements and regulations under PUHCA no longer exist and other regulatory programs at the state and federal level have arisen to address remaining concerns;
• PUHCA's restrictions and requirements deter and inhibit the otherwise orderly flow of capital into emerging competitive markets; and
• PUHCA requirements might well work at cross purposes with other important national energy initiatives.

To provide some historical perspective, it must be remembered that when PUHCA was enacted nearly 67 years ago, it was designed primarily to eliminate the unsound financial structures that had been created by gas and electric holding companies during the 1920s. Abuses discovered at the time included the marketing of holding company securities based on unsound and fictitious values and without adequate disclosure to investors, and a practice by some companies of requiring their operating utility subsidiaries to pay excessive dividends or purchase services at excessive prices under non-arms-length service contracts.

Congress entrusted the administration of this statute to the new Securities and Exchange Commission ("SEC") because the SEC was the agency with the greatest expertise in financial matters and was already charged with the responsibility for overseeing investor protection under the Securities Act of 1933 and the Securities and Exchange Act of 1934. PUHCA is unique, however, in that it is the only securities statute designed to regulate a single non-financial industry.

The task of overseeing the financial restructuring of the electric and gas utility holding companies was largely completed by the mid-1950s. And, as the SEC’s role in administering other federal securities laws has evolved, it has become clear that PUHCA no longer serves any independent purpose in assuring investor protection. PUHCA is intended, after all, to regulate "the corporate structure and financing of public-utility holding companies and other affiliates." There is no question but that this authority is redundant of that which the SEC already has under the Securities Act of 1933 and Securities and Exchange Act of 1934. And in part for that reason, since 1982, the SEC has been on record favoring repeal of PUHCA.

Some have argued, however, that repeal of PUHCA would create a new "gap" in effective state/federal regulation of utilities to the detriment of utility customers. But in this regard, it is important to remember what PUHCA does, and what it does not do. PUHCA does not, and was never intended to, address rate regulatory issues. Local distribution matters are exclusively within the province of state regulators, while the setting of wholesale rates and other transactions by utilities relating to the transmission of electricity or of natural gas in interstate commerce are regulated by the FERC. Repeal of PUHCA as proposed in the bill before you would not alter this allocation of jurisdiction and authority and indeed, the record keeping and report requirements of the legislation will facilitate the on-going work of FERC and state agencies to protect ratepayer interests.

Moreover, the "gap" in effective state regulation of electric and gas utilities that Congress found in 1935 no longer exists. Simply put, electric and gas utilities are among the most highly regulated businesses there are, and there is no longer any basis for believing that the states and the Federal Energy Regulatory Commission ("FERC") are unable to protect utility consumers.

If PUHCA were merely an arcane law directed at problems that no longer exist, or simply duplicated other federal and state regulatory laws, perhaps the case for PUHCA repeal would not be quite so compelling. But because of the structural inflexibility that is built into PUHCA, the statute has long been an obstacle to the implementation of significant competitive, economic and regulatory changes occurring in this country and throughout the world. PUHCA prevents registered holding companies from participating equally with all other energy companies in various activities that Congress and other federal agencies are promoting, and, in addition, deters new investment in certain energy businesses by non-traditional investors by subjecting them to possible SEC regulation as statutory "holding companies."

In the past, Congress has addressed the "PUHCA Problem" in a piecemeal fashion. For example, Congress passed legislation in 1978 and again in the mid-1980’s designed to promote the development of and investment in cogeneration and small power production facilities in the United States. Further amendments in 1990 were designed to allow the registered gas utility holding companies to participate fully in natural gas supply ventures. In 1992, the Energy Policy Act d somewhat lowered the PUHCA barrier to the development of an independent, competitive, wholesale generation market, and lastly in 1996, Congress authorized registered holding companies – like all other companies – to invest in new telecommunications businesses.

Nonetheless, the "integration" standards under PUHCA remain an obstacle to economically desirable utility mergers. The FERC’s review of electric utility mergers focuses on assuring that they are pro-competitive, that is, that a merger does not lead to a situation in which the resulting company has too much control over generation assets in a single geographic market. Under the FERC’s merger guidelines, therefore, it is much easier to form a union between utilities that operate in different markets than between utilities that operate next door to each other. And yet the PUHCA integration standard stands in the way of geographically diverse utility systems by limiting a registered holding company to a single "integrated" electric system that’s confined to a single area or region.

PUHCA also prevents registered holding companies from engaging in many desirable non-utility businesses, or, at a minimum, requires lengthy filings with the SEC and onerous ongoing reporting obligations that unregulated competitors in these businesses are not subjected to. This intrusion into the business judgment of holding company management is unprecedented under federal law and positively harms the interest of investors by imposing costs in the form of lost business opportunities and regulatory compliance costs.

Under PUHCA, a company organized to construct and own new generation [except "exempt wholesale generators" (called an "EWG")] or transmission facilities would be an "electric utility company," and any 10% owner of its stock would be a "holding company." Every holding company must register under PUHCA, absent an available exemption. Registration would subject an investor to onerous financial and business regulation by the SEC. In addition, in many cases, an investor who acquires 5% or more of the stock of an electric utility company would require SEC approval, which necessitates a lengthy review process. Therefore, out-of-state utilities, as well as other types of non-traditional investors (e.g., equipment suppliers, diversified energy companies, and financial investors) are effectively deterred from making innovative investments in new generation or transmission assets. The EWG exemption does not apply to an entity (called a "Transco") that is originated to build a new transmission line to transport new generation capacity.

Existing utilities and holding companies would find it difficult to obtain SEC approval under PUHCA to acquire 5% or more of the stock of a new generation or transmission company. This is because the "integration" standards under PUHCA prohibit investments in utilities in more than one state unless the facilities in each state are physically interconnected with each other.

A non-traditional investor (e.g., an equipment manufacturer, a diversified energy concern, or a financial investor) may not qualify for any exemption under PUHCA if it became a "holding company" over a new generation or transmission company. Thus, PUHCA hinders non-utilities from making investments in new generation or transmission assets.

The only practical option for investing in new generation in California, for example, is through an "exempt wholesale generator," or an "EWG" for short. An EWG is exempt from all provisions of PUHCA and the owners of an EWG are not treated as "holding companies." But holding companies that are already registered under PUHCA, which now account for more than 40% of the entire electric utility industry, are limited by SEC regulations in the amount of investments that they may make in EWGs. This investment restriction has impacted the wholesale market in two ways:

• First, many registered holding companies have already reached their investment limit on other EWG projects and thus cannot enter new markets. Thus, even if these utilities wanted to enter the troubled California generation market, the PUHCA investment limit would prohibit them from doing so or, at a minimum, necessitate a lengthy and uncertain application review process at the SEC in order to obtain increased investment authority.

• Second, the EWG exemption applies only to entities that generate electricity "exclusively" for sale at wholesale. Thus, the EWG exemption provides no relief for new investment in generation assets where the output will be sold at retail, even though such retail sales are permitted – and even encouraged – by state utility restructuring laws.

Passage of the bill before you will eliminate the artificial structural and financial barriers that now inhibit the flow of capital and would thus contribute to the resolution of California and broader Western regional energy problems. To be clear, we are not here claiming that PUHCA repeal, by itself, will solve the problems in Western markets, just as it is by no means the sole cause of those problems, but elimination of its outdated restrictions will certainly facilitate the development of new generation and transmission capacity in the West. All steps that can be taken to enhance investment in generation and transmission capacity should be made during this energy shortfall. Free flow capital is not merely a theoretical problem. Customers throughout the Western Region have been hurt by the lack of development of generation and transmission.

In short, with its mandate of a vertically integrated utility system confined to a single area or region, PUHCA is clearly a barrier to increasing competition in the electric and gas utility industries. It inhibits efficiency gains, limits new competitors in the marketplace, leads to differing regulatory rules for competitors that are holding companies, and contributes to inefficient investment decisions by utility management and shareholders. These costs are real, substantial and should not be continued.

The requirements of PUHCA are also posing a serious near-term obstacle to

implementation of another national energy policy – the formation of regional

transmission organizations (RTOs) pursuant to FERC Order No. 2000.

We see more and more that a preferred model for RTO structures is the so-called Transco or Independent Transmission Company (ITC). The ITCs are independent for-profit companies to which many utilities seek to transfer both ownership and operating control of their transmission assets. The ITC treats transmission like a business, and has the most incentive to move power – from whatever generating source. And, their for-profit status provides an efficient answer to reliably and competitively manage the system and – most importantly today – provide for its expansion. Yet, PUHCA would treat these new entities as "electric utility companies." Ownership of securities in ITCs would subject many now-exempt holding companies – and even utilities that aren’t holding companies of any kind – to burdensome PUHCA restrictions.

Moreover, the registered electric utility holding companies (which now account for more than 40% of the entire electric utility industry) will need to seek routine approvals from the SEC in order to transfer their transmission assets to RTOs and to provide other financial support. Thus, we have one federal agency (the FERC) that is seeking to restructure the ownership and/or control of the nation’s transmission grid, while another federal agency (the SEC) stands in the way.

PUHCA should be repealed at the earliest possible date. Therefore, Xcel Energy and the Coalition would support appropriate "stand alone" legislation or the inclusion of satisfactory legislative language repealing PUHCA in an acceptable "comprehensive" bill. And, we believe that PUHCA repeal should be clean, without lingering vestiges of this statue

As the SEC has noted for almost 20 years now, PUHCA is an archaic law that has long since served its original intended purposes. The abuses that gave rise to the passage of PUHCA no longer exist and are unlikely to recur, due to the existence of other regulatory laws. At the same time, PUHCA has presented and will continue to present an obstacle to the realization of other federal and state energy initiatives that favor competition and new investment. In short, as a regulatory law, PUHCA almost always pushes in the wrong direction.

Thank you again, Mr. Chairman, for the opportunity to submit this testimony to the Subcommittee.

* * * * *

ATTACHMENT 1 -- LIST OF COALITION

Allegheny Energy
American Electric Power
Cinergy Corporation
CMS Energy
Duke Energy
Entergy Corporation
Exelon Corporation
Florida Power & Light
GPU
MDU Resources
MidAmerican Energy
Pepco
NiSource
Northeast Utilities
Progress Energy
Reliant Energy
Southern Company
TXU
Xcel Energy

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