Mr. Chairman and Members of the Committee: Good morning. My name is Robert Gee. I am a Commissioner at the Public Utility Commission of Texas and Chairman of the Electricity Committee of the National Association of Regulatory Utility Commissioners, commonly known as NARUC.
The NARUC is a quasi-governmental nonprofit organization founded in 1889. Within its membership are the governmental bodies of the fifty States engaged in the economic and safety regulation of carriers and utilities. The mission of the NARUC is to serve the public interest by seeking to improve the quality and effectiveness of public regulation in America. More specifically, the NARUC consists of the State officials charged with regulating the retail rates and services of electric utilities. We have the obligation under State law to assure the establishment and maintenance of such energy utility services as may be required by the public convenience and necessity, and to ensure that such services are provided at rates and conditions which are just, reasonable and nondiscriminatory for all consumers.
Thank you, Mr. Chairman, for allowing me to appear at this hearing on an issue of critical importance to State utility regulators. Regardless of the fate of the Public Utility Holding Company Act of 1935 (PUHCA), the NARUC and State commissions will play an indispensable role in managing any transition to a more competitive energy market -- an activity which is underway in 49 of the 50 States.
We also commend the Committee for its continued investigation as to whether the current statute is consistent with the changes in today's electric services industry. The changes affecting the electric utility industry, including State initiatives to promote competition and regulatory reform in retail power markets and the Federal Energy Regulatory Commission's (FERC) implementation of its rulemaking to open wholesale transmission access, makes this a timely opportunity to again consider whether the '35 Act should remain the sole means of regulating registered utility holding companies.
Against this background, allow me to explain the NARUC's position on PUHCA. I will then proceed with a summation of the NARUC analysis of S. 6219 introduced just days ago by the Chairman.
The NARUC's policy position regarding changes to the Holding Company Act was originally adopted in March 1995. A more recent Resolution concerning PUHCA was adopted in July 1996 (see attached). The recommendations made by the Securities and Exchange Commission (SEC) in June 1995, which recommended 'conditional repeal' of the Holding Company Act, recognize the importance of States' oversight of these types of utility systems. While the SEC's legislative recommendations are consistent with many suggestions made by the NARUC, the scope of the SEC recommendations are not. The NARUC favors changes to PUHCA only if made in conjunction with more comprehensive revisions to the Federal Power Act that enhance State restructuring activities.
We recognize that the Chairman's legislation, S. 621, largely comports with many of the SEC's policy recommendations, and the NARUC appreciates your efforts to affirm the importance of State oversight of multi-state utility holding companies. The Association also believes S. 621 moves in a positive direction toward rationalizing regulatory oversight in an increasingly competitive market. But a competitive market needs to function fairly and effectively before repealing the '35 Act so that no market participant is provided an unfair competitive advantage by virtue of its corporate structure.
As stated in the NARUC's resolution adopted last summer, a principal concern with regard to reform of PUHCA is to ". . ensure that the authority of the States to regulate utility holding companies is not preempted or restricted..." Transferring the SEC's regulatory authorities to the, FERC may, indeed, provide for a more reasonable, streamlined approach to regulating the activities of these companies to ensure the provision of reliable service at reasonable costs. However, the NARUC also strongly believes that States have a compelling interest in ensuring that consumers are provided services at costs that are reasonable and justifiable. Therefore, any legislation to reform PUHCA must be balanced and continue to enable States to determine the reasonableness of utility costs of service so that consumers are not left paying rates that include costs of multi-state utility activities unrelated to the provision of energy services.
The NARUC believes that any transition period, whether contained in stand-alone PUHCA legislation or in a more comprehensive measure, should reflect the States' local market and the States' needs in obtaining the requisite enabling authorities from their respective State legislatures prior to the effective date of the PUHCA repeal or reform. If stand-alone PUHCA reform legislation were to be passed, despite our serious reservations, we believe that a minimum two-year transition would be advisable since not all State legislatures meet annually. If incorporated in a broader effort to amend laws governing the electric utility industry, we suggest that any PUHCA reformation be coordinated in a manner consistent with legislation that addresses customer choice and any provisions that address concerns relating to undue market power.
In addition, the NARUC cannot support a simple transfer of the SEC's authorities over affiliate transactions to the FERC without clarifying the FERC's and States' respective authorities over such transactions. Legislation to reform PUHCA must recognize and address the fact that holding company corporate structures are complex and can impose costs on utility ratepayers, and have proven to cause jurisdictional disputes among State and Federal regulators.
As you may know, a 1992 decision of the United States Court of Appeals for the D.C. Circuit, commonly referred to as the Ohio Power decision, held that SEC approval of non-power affiliate transactions prevails over any decision to the contrary made by the FERC or, by implication, the States. This decision threatens State regulation concerning the costs of inter-affiliate transactions sought by the utility to be recovered in retail rates and, accordingly, should be legislatively reversed to ensure that the costs of all non-power transactions between holding company affiliates be subject to review by the appropriate State and Federal rate making authority. In short, the legislation must clarify States' unrestricted authority over affiliate transactions. Relaxing restrictions on utility diversification should not be allowed in the absence of provisions which clearly define the States' authority to provide necessary safeguards.
NARUC's policy on PUHCA requires that any legislation to reform the Holding Company Act should unequivocally establish an enforceable State right of access by States to all such books and records, wherever located, that directly or indirectly affect consumers. States' rights to secure access to books and records is critical for the effective oversight of out-of-state activities of multi- state holding companies that affect utility rates.
Protecting the FERC's and States' ability to audit and investigate companies in a registered system is an important complement to the right to obtain access to books and records. The NARUC has been a longstanding proponent of independent authority for State commissions to audit transactions between the parent holding companies and its subsidiaries and affiliates. The NARUC also supports State efforts, working in conjunction with Federal regulatory authorities, to audit multi-state registered holding companies in a coordinated fashion.
Since the adoption of NARUC's 1995 resolution on PUHCA, and while the Congress has debated the necessity of PUHCA, electric utilities have begun bracing for the onset of a more competitive energy sector. As a means to strengthen their position in any newly structured electric market, utilities have engaged in mergers, or contemplated mergers, with potential competitors. Industry consolidation has been argued by some to be inconsistent with the efforts being taken by both the FERC and the individual State commissions and legislatures to enhance the choices wholesale and retail consumers are to be provided on an unbundled basis.
The NARUC expressed its concern in a 1995 Resolution that economic efficiencies associated with growing competition may not be realized if mergers have an adverse impact of competition in the generation market. The Association reiterated its concerns in its July 1996 Resolution by stating that '[a]ny legislation must recognize that regulation should be reduced only as competition becomes effective at preventing monopoly abuses and allowing pro- competitive change and availability of customer choice." As we continue to debate the role of PUHCA in the current electric market, and as a more market- oriented approach to the provision of energy services is contemplated or implemented, we must also be mindful of the potential for market power being concentrated in the hands of fewer competitors. For this reason, the NARUC supports the establishment of a mechanism that maintains effective State and Federal regulation against abusive holding company practices that could place undue market power in the hands of multi state holding companies and harm the development of competition.
While the NARUC believes that PUHCA reform legislation should not pass separately from legislation to more broadly amend Federal electric utility laws, the Association would be remiss not to suggest ways to further improve S. 621 should it ultimately proceed to a Committee vote. But first, the Association would like to commend the Chairman's recognition of the need for States to protect customers of multi-state electric utility holding companies from potential abuses. The bill helps to ensure the States' ability to access multi-state holding company books and records, audit multi-state holding companies and regulate affiliate transactions within a holding company system.
Also, the provisions pertaining to State access to books and records will go a long way to enable States to meet their State mandated oversight responsibilities. The NARUC commends the Chairman for including, in this year's bill, provisions added to last year's bill by the Committee that address the enforcement of books and records accessibility, which are identical to the approaches contained in the Energy Policy Act of 1992 and the Telecommunication Act of 1996. Because those changes to the Act would be repealed if S. 621 were enacted in its current form, such an enforcement provision should be clarified to ensure the continued right of State commissions to obtain access to books and records of exempt wholesale generators and exempt telecommunications companies.
Prior to adopting S. 621 by this Committee, the NARUC also requests clarification of the exemption provisions. It would be helpful if the authority given to the FERC to terminate a grand-fathered utility exemption under the '35 Act was revised to ensure that all utility holding companies are subject to comparable regulatory treatment regardless of corporate form. Also, the NARUC would support clarifying that FERC's authority to exempt 'any person or transaction" does not translate into an ability to exempt utility companies from State regulation under this legislation, including the ability to obtain access to books and records.
As stated above, the NARUC advises the Committee to include a more meaningful transition period to enable States to obtain the requisite authorities to effectively oversee multi-state holding companies if this bill were to be enacted into law. While we appreciate the Committee's response to our concerns during last year's debate by changing the effective date from twelve to eighteen months, in our view, a transition period of two years, at a minimum, would be more appropriate to enable State commissions to acquire such enabling authorities necessary for meaningful oversight of registered holding companies.
For instance, in my State of Texas, as well as other States, the State legislature meets just once every two years. In fact, the Texas legislature is meeting this year. When the Texas legislature meets, it traditionally does so for just six months at the beginning of the year. Therefore, if PUHCA were enacted into law this year, my public utility commission would need to assess whether it required additional multi-state utility oversight authority and, if so, would need an opportunity to seek such authority from our legislature. However, because our commission would be unable to secure such authority until 1999, during such time we could be without adequate safeguards to protect consumers from cross-subsidization abuses and diversification risks.. Further, in other jurisdictions, registered holding companies would be free to restructure or to diversify into other lines of businesses conceivably absent any State or Federal oversight.
Again, incorporating these suggestions are important whether PUHCA reform legislation proceeds on a stand-alone basis or as part of a comprehensive measure with the understanding that the NARUC recommends against pursuing PUHCA reform legislation separately.
As we continue to advance toward a more competitive electric market, PUHCA may indeed become less relevant. However, in the absence of a truly competitive market, we must carefully assess what safeguards are necessary to protect consumers from potential abusive practices by holding companies. We must also evaluate whether such changes are consistent with the pro-competitive changes in the electric market and do not discourage greater competition in the marketplace. For these reasons, the NARUC believes reform of PUHCA must be considered in conjunction with broader changes to the Federal Power Act that support State and FERC efforts to provide utility customers with options in emerging competitive markets.
The NARUC, again, appreciates the opportunity to present its views, and
looks forward to working with the Chairman and Members of this committee in
crafting legislation that complements State and FERC efforts to promote
competition in the utility industry while assuring that the utility ratepayers are
provided adequate projections against possible abuses.
WHEREAS, Legislation to reform or repeal the Public Utility Holding Company Act of 1935 (PUHCA or the Act) is again being considered by Congress, in light of an increasingly competitive electricity market and the potential economic efficiencies associated with growing competition in the electric industry; and
WHEREAS, The National Association of Regulatory Utility Commissioners (NARUC) and State commissions will play an indispensable role in managing any transition to a more competitive energy market in order to ensure that energy services are provided at rates and conditions that are just, reasonable and nondiscriminatory for all consumers; and
WHEREAS, The NARUC supports reducing some of the restrictions and prohibitions of the Act, while favoring those specific enforcement mechanisms in the PUHCA amendments enacted in the Energy Policy Act of 1992 and the Telecommunications Act of 1996 which, inter alia, provide State commission access to holding company books and records of exempt wholesale generators and exempt telecommunications companies, State consent for sale of jurisdictional utility assets, protection against abusive affiliate transactions, and independent audit authority for the effective discharge of State oversight responsibilities; and
WHEREAS, The NARUC, by a previous resolution on PUHCA reform, supports the position that such reform should not include arbitrary distinctions based on corporate structure, should ensure that the authority of the States to regulate utility holding companies is not preempted or restricted, and should include a meaningful transition period before the new Federal legislation takes effect; now, therefore, be it
RESOLVED, By the Executive Committee of the National Association of Regulatory Utility Commissioners, convened at its 1996 Summer Meeting in Los Angeles, California, that any legislation to change PUHCA should be consistent with the following:
With these protections for consumers, the States will be able to regulate where they must to protect the public interest and deregulate when market conditions warrant.
Sponsored by the Committee on Electricity
Adopted July 25, 1996
Reported NARUC Bulletin No. 32-1996, page 13.
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