The Securities and Exchange Commission (SEC ) supports S. 621 and the goals that it seeks to achieve. The bill would repeal the Public Utility Holding Company Act of 1935 ("1935 Act") and establish a less pervasive framework for regulation of public utility holding companies, thereby eliminating provisions that duplicate other federal and state regulation while, at the same time, preserving important protections for consumers. The bill is consistent with most of the key elements of the recommendations of the SEC concerning the future regulation of public utility holding companies.
The 1935 Act was enacted to address and correct abusive practices that had developed in the electric and gas utility industry in the first quarter of the century, to the detriment of investors, consumers and the public interest. However, the 1935 Act has become redundant in many respects, as a result of prudent administration of the statute and the development and evolution of other state and federal regulation. Moreover, the regulation contemplated by the Act to address the problems of a different era may prevent companies from responding effectively to the changes now occurring in the utility industry.
The SEC staff, at the direction of Chairman Arthur Levitt, undertook a study of the regulation of public utility holding companies in the summer of 1994. The study culminated in a June 1995 Report of the SEC staff that proposed a range of legislative and administrative measures to eliminate unnecessary regulatory burdens on public utility holding company systems.
The SEC recommended that Congress consider three legislative options, based on the analysis and conclusions contained in the Report. The preferred option is repeal of the 1935 Act, accompanied by the creation of additional authority at the state and federal level to permit the continued protection of consumers through examination and oversight of transactions between or among holding company affiliates by the Federal Energy Regulatory Commission ("FERC"), and through access to books and records by the FERC and state utility commissions. The SEC believes conditional repeal is a preferred course of action because it would achieve the economic benefits of unconditional repeal, and yet also preserve the ability of states to protect consumers.
S.621 largely implements the option recommended by the SEC, by providing the
FERC and the state regulators with broad authority to inspect books and records of
companies in holding company systems. The bill does not, however, adopt the SEC's
recommendation that the FERC have discretion to exercise jurisdiction over affiliate
transactions, including prior review and approval of such transactions in appropriate
circumstances. The SEC continues to believe that such authority is necessary to shield
consumers from the potential abuses that may be involved in affiliate transactions.
Chairman D'Amato and Members of the Committee:
I am pleased to have this opportunity to testify before you on behalf of the Securities and Exchange Commission ("SEC") and to express support for S. 621. By repealing the Public Utility Holding Company Act of 1935 ("1935 Act") and establishing a less pervasive framework for federal regulation of public utility holding companies, the bill would eliminate duplicative regulation while also preserving important protections for customers of utility companies in multi-state holding company systems. The legislation incorporates most of the SEC's recommendations with respect to the future of public utility holding company regulation. As was the case with the bill's predecessor, S. 1317, the SEC shares the concerns addressed by the legislation and supports the goals that it seeks to achieve.
The electric and gas utility industry had developed serious problems in the first quarter of the century through the misuse of the holding company structure. The 1935 Act was enacted to address these problems. Reorganization and simplification of existing public utility holding companies in order to eliminate those abuses was a major part of the SEC's work in the years following passage of the 1935 Act.
In the early 1980's, the SEC unanimously recommended that Congress repeal the statute. The SEC concluded that the 1935 Act had accomplished its basic purpose and that its remaining provisions, to a large extent, either duplicated other state or federal regulation or otherwise were no longer necessary to prevent recurrence of the abuses that led to its enactment. Many aspects of 1935 Act regulation had become redundant: state regulation had expanded and strengthened since 1935, and the SEC had enhanced its regulation of all issuers of securities, including public utility holding companies. In addition, institutional investors such as pension funds and insurance companies had become more sophisticated and demanded more detailed information from all issuers of securities than was previously available. Changes in the accounting profession and the investment banking industry also had provided investors and consumers with a range of protections unforeseen in 1935.
Because the potential for abuse through the use of multi-state holding company structures., and related concerns about consumer protection, continued to exist, and because of a lack of consensus for change, repeal legislation was not enacted in the early 1980's. Since that time, however, the SEC has continued its effort to administer the 1935 Act flexibly to accommodate developments in the industry while adhering to the basic purpose of the statute. In addition, Congress has created a number of statutory exceptions to the regulatory framework of the 1935 Act.
In response to continuing changes in the utility industry in recent years, and the accelerated pace of those changes, Chairman Arthur Levitt directed the SEC's Division of Investment Management in 1994 to undertake a study, under the guidance of then-Commissioner Richard Y. Roberts, to examine the continued vitality of the 1935 Act. The study was undertaken as a result of the developments noted above and the SEC's continuing need to respond flexibly in the administration of the 1935 Act. Its purpose was to identify unnecessary and overlapping regulation, and at the same time to identify those features of the statute that remain appropriate in the regulation of the contemporary electric and gas industries.
The SEC staff worked with representatives of the utility industry, consumer groups, trade associations, investment banks, rating agencies, economists, state, local and federal regulators, and other interested parties during the course of the study. In June 1995, a report of the findings made during the study ("Report") was issued. Based on these findings, the SEC has recommended, and continues to recommend, that Congress repeal the 1935 Act. At the same time, however, the SEC also recommends enactment of legislation to provide necessary authority to the FERC and the state public utility commissions relating to affiliate transactions, audits and access to books and records, for continued protection of utility consumers.
There are several reasons why the SEC supports conditional repeal of the 1935 Act. As the Report indicates, portions of the 1935 Act, governing issuance of securities, acquisition of other utilities, and acquisition of non utility businesses by registered holding companies, largely duplicate other existing regulation and controls imposed by the market. Nevertheless, there is a continuing need to ensure the protection of consumers.
Electric and gas utilities have historically functioned as rate-regulated monopolies, and there is a continuing risk that a monopoly, if left unguarded, could charge higher rates and use the additional funds to subsidize affiliated businesses in order to boost its competitive position in other markets ("cross-subsidization"). So long as electric and gas utilities continue to function as monopolies, the need to protect against the cross-subsidization utility businesses will remain. The best means of guarding against cross-subsidization is likely to be audits of books and records and federal oversight of affiliate transactions.
Utility rates are regulated by state authorities, and some regulators subject these rates to stricter scrutiny than others. A survey of state regulation, undertaken in conjunction with the study, revealed that the states may not have adequate authority to perform audit and review functions with respect to multi state holding companies. The provisions of the 1935 Act provide significant assistance to these states in their effort to protect utility consumers. Earlier efforts to repeal the 1935 Act may have failed because they did not address this potential "regulatory gap" in consumer protection. III . 621
S.621 would provide the FERC with the right to examine books and records of registered holding companies and their affiliates that are relevant to costs incurred by associated utility companies, in order to protect ratepayer's. The legislation would also provide an interested state commission with access to such books and records (subject to protection for confidential information), if they are relevant to costs incurred by utility companies subject to the state commission's jurisdiction and are needed for the effective discharge of the state commission's responsibilities in connection with a pending proceeding. Finally, the bill would provide a transition period in which states, utilities and other parties affected by the change in the regulatory regime could prepare for the new regime. The bill, like its predecessor, S. 1317, accomplishes many of the goals of the conditional repeal contemplated by the SEC.
S.621 does not give the FERC the authority it needs to oversee transactions among affiliates in holding company systems and, in this one respect, does not reflect the SEC's preferred legislative option. The bill's provisions granting access to books and records provide the FERC and the state commissions with the authority they need to identify affiliate transactions and their. terms and effects on utility costs and rates. However, the potential for cross-subsidization and consequent detriment to consumers remain, and the SEC believes that it is important for the FERC to have the flexibility to engage in more extensive regulation, if necessary. As a result, the SEC continues to support a broader grant of authority to the FERC to oversee these transactions, including, if the FERC deems it appropriate, prior review and approval of affiliate transactions.
The SEC notes that the Report recommended a transition period of at least one year in duration. The National Association of Regulatory Utility Commissioners has since suggested that a longer period is necessary, in view of the fact that many state legislatures only meet once every two years. The SEC would have no objection to a longer transition period.
Two other legislative options were recommended by the SEC staff Report: complete repeal of the 1935 Act and a grant of broader exemptive authority under the Act to the SEC.
The SEC believes that complete repeal, the second legislative option, is premature, because of the remaining industry monopoly power and the inconsistent pattern of state regulation described above. Some commentators contend, however, that the states have the ability, if they choose to exercise it, to create regulatory structures that will protect utility consumers in holding company systems to the same extent as they are protected by the 1935 Act. Complete repeal, like conditional repeal, would require a reasonable transition period. As noted above, some states may need a period of at least two years to enact new legislation or to add resources to meet the additional regulatory burden that would accompany unconditional repeal of the 1935 Act.
The third option is to provide the SEC with more authority to exempt holding company systems from the . requirements of the 1935 Act. An expansion of exemptive authority would not, of course, achieve the economic benefits of conditional or unconditional repeal of the 1935 Act, or simplify the federal regulatory structure. Further, this option would continue to enmesh the SEC in difficult issues of energy policy.
The SEC is also aware that proposals for comprehensive reform of energy legislation are under consideration by Congress. Repeal of the 1935 Act could also be considered as part of this overall reform.
The SEC continues to support a comprehensive approach to reform of the 1935 Act, such as that reflected in S. 621. Pending Congressional action, however, the SEC has begun to implement many of the numerous administrative initiatives that were recommended in the Report to streamline regulation. Despite the effects of these initiatives, changes in the utility industry are resulting in increased activity under the 1935 Act, in the areas of mergers and acquisitions, diversification and affiliate transactions, for example, and continuation of the 1935 Act in its present form will require additional resources.
The options of conditional repeal or an expansion of the SEC's exemptive
authority also raise the issue of resources. At present, sixteen full-time professional SEC
employees are employed in the administration of the 1935 Act. Their work includes (1)
analysis and disposition of various transactions for which the 1935 Act requires prior
SEC authorization, (2) status issues under the 1935 Act, (3) audits of
holding company systems and related companies, and (4) drafting and implementation of
rule making proposals to reflect changes in the utility industry and in financial regulation.
Repeal of the 1935 Act would not achieve significant cost savings for the federal
government, particularly if some of these responsibilities were carried out by
the FERC. Expanded exemptive authority, on the other hand, could require greater
resources, in view of the need to evaluate and implement broad requests for exemptive
The SEC takes seriously, its duties to administer faithfully the letter and spirit of
the 1935 Act, and is committed to promoting the fairness, liquidity, and efficiency of the
United States securities markets. By supporting conditional repeal of the 1935 Act, the
SEC hopes to reduce unnecessary regulatory burdens on America's energy industry while
providing adequate protections for energy consumers.
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