Public Utility Holding Company Act Rules

Federal RegisterApr 28, 1994

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 250 and 259

[Release No. 35-26031; File No. S7-35-92]

RIN 3235-AF68

Public Utility Holding Company Act Rules

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Final rules.

-----------------------------------------------------------------------

SUMMARY: The Commission today is adopting amendments to rules and forms

under the Public Utility Holding Company Act of 1935 (``Act''). The

amendments will expand certain exemptions, and generally update and

clarify the requirements of the rules. The Commission is rescinding

rule 50, which required competitive bidding in connection with the

purchase or underwriting of securities of companies in a registered

system. The rulemaking is intended to reduce regulatory burdens under

the Act.

EFFECTIVE DATE: May 31, 1994.

FOR FURTHER INFORMATION CONTACT: Joanne C. Rutkowski, Assistant

Director, (202) 942-0545, or Brian P. Spires, Attorney, (202) 942-0557,

Office of Public Utility Regulation, Division of Investment Management,

Securities and Exchange Commission, 450 Fifth Street, NW., Washington,

DC. 20549.

SUPPLEMENTARY INFORMATION: On November 4, 1992, the Commission proposed

for comment a rulemaking intended to modernize and streamline

regulation under the Act.1 The Commission is adopting the proposed

amendments to rules 7 (17 CFR 250.7), 26 (17 CFR 250.26), 27 (17 CFR

250.27), 29 (17 CFR 250.29), 40(a)(5) (17 CFR 250.40(a)(5)), 41(c) (17

CFR 250.41(c)), 42(b) (17 CFR 250.42(b)), 43(b) (17 CFR 250.43(b)),

44(b) (17 CFR 250.44(b)), 49 (17 CFR 250.49), 52 (17 CFR 250.52), 62

(17 CFR 250.62), 63 (17 CFR 250.63), 65(b)(2) (17 CFR 250.65(b)(2)),

and 71(b) (17 CFR 250.71(b)) under the Act [15 U.S.C. 79 et seq.] and

forms U5S, U-12(I)-A and U-12(I)-B, and rescinding rule 50 (17 CFR

250.50). The Commission is deferring action on the proposed amendments

to rule 83(d) (17 CFR 250.83(d)) and to the annual report on Form U-13-

60 for service company subsidiaries of registered holding companies (17

CFR 259.313), pending further consideration.

---------------------------------------------------------------------------

\1\See Holding Co. Act Release No. 25668, 57 FR 54025 (Nov. 16,

1992).

---------------------------------------------------------------------------

Comments were received from eight registered holding

companies,2 two service company subsidiaries of registered holding

companies,3 and two other parties.4 The Commission has

carefully considered these comments, and is incorporating a number of

the suggestions in the rule and form amendments that it is adopting

today.

---------------------------------------------------------------------------

\2\The Southern Company (``Southern''), American Electric Power

Company (``AEP''), Central and South West Corporation (``CSW''), The

Columbia Gas System, Inc. (``Columbia''), Consolidated Natural Gas

Company (``CNG''), Northeast Utilities (``Northeast''), General

Public Utilities Corporation (``GPU'') and New England Electric

System (``NEES'') filed comments.

\3\EUA Service Corporation and GPU Service Corporation, service

company subsidiaries of Eastern Utilities Associates, a registered

holding company, and GPU, respectively, filed comments.

\4\Comments were filed by the Investment Company Institute

(``ICI''), a national association of investment companies, and by

Heritage Propane Corporation (``Heritage''), a Delaware corporation

engaged, through subsidiaries, in the sale of propane in enclosed

portable containers and through metered systems.

---------------------------------------------------------------------------

I. Introduction

The Commission is adopting various measures intended generally to

modernize the rules under the Act and, in particular, to reduce undue

regulatory burdens on companies in a registered holding company system.

These measures grew out of the Commission's continuing assessment of

the appropriateness of existing regulatory requirements.

A. Rule 7(a): Companies Deemed Not To Be Electric or Gas Utility

Companies

Under rule 7(a), a company is deemed not to be an electric utility

company or a gas utility company, within the meaning of sections

2(a)(3) and 2(a)(4) of the Act, respectively, if the company is

primarily engaged in one or more nonutility businesses, and the

company's gross sales of electricity, or of natural or manufactured gas

distributed at retail, do not exceed a specified amount.5 At

present, the rule permits such companies to make annual utility sales

of up to $100,000. The proposed amendment would allow average annual

sales of up to $5 million.6

---------------------------------------------------------------------------

\5\17 CFR 250.7(a).

\6\The rule employs a three-year test period. Use of a three-

year average should eliminate the need for an application when sales

in a given year unexpectedly exceed the dollar limitation.

---------------------------------------------------------------------------

Columbia, CNG and Heritage support adoption of the amendment.

Northeast suggests that the amendment, as it relates to sales of

electricity, is unnecessary in view of the broad exemptions already

provided under the Public Utility Regulatory Policies Act of 1978

(``PURPA'') [16 U.S.C. Sec. 824a-3(e)],7 and the Energy Policy Act

of 1992.8 The exemption under rule 7(a), however, is not related

to the exemptions under PURPA and the Energy Policy Act. The rule is

intended to accommodate a small amount of energy sales by a company

that is otherwise engaged in a nonutility business. In comparison, the

exemptions under PURPA and the Energy Policy Act are intended to

encourage the growth of a competitive energy market. The proposed

amendment does not conflict with these statutes or the legislative

policies that underlie them.

---------------------------------------------------------------------------

\7\Pursuant to section 210 of PURPA, the Federal Energy

Regulatory Commission has adopted rules generally exempting

cogeneration facilities and small power production facilities from

treatment as public-utility companies for purposes of the Act. See

18 CFR 292.602(b).

\8\Pub. L. No. 102-486, 106 Stat. 2776. The Energy Policy Act

amended the Act to create two new classes of exempt entities, exempt

wholesale generators and foreign utility companies. See sections 32

and 33 of the Act, as amended.

---------------------------------------------------------------------------

Columbia and Heritage ask the Commission to adopt a different test

of revenues. Columbia suggests that the exemption should apply to a

company with gas utility revenues no greater than 5% of its nonutility

revenues.9 Under the Heritage proposal, a company that is not a

state-regulated utility could receive up to 20% of its gross revenues

from the sale of manufactured gas at retail. The Commission is

concerned that these approaches could vitiate the rationale for the

exemption, which is the small absolute size of the utility operations,

not the relative size of utility and nonutility operations, and so

declines to adopt them.

---------------------------------------------------------------------------

\9\Columbia cites the example of a company that is primarily

engaged in the business of distribution of natural or manufactured

gas in enclosed portable containers, but derives revenues of more

than $5 million from the distribution of natural gas to a central

storage tank and through underground pipeline systems. Such an

arrangement may be found in real estate developments and small

towns.

Section 2(c) exempts municipalities from the scope of the Act.

In addition, a company such as that described by Columbia can apply

for an order declaring it not to be a public-utility company for

purposes of the Act. See, e.g., AmeriGas Propane, Holding Co. Act

Release No. 25434, 50 SEC Docket 918 (Dec. 20, 1991) (propane

company declared not to be a public-utility company where

underground pipeline sales were less than 5% of total revenues).

---------------------------------------------------------------------------

The Commission believes that the increase in the dollar limit to $5

million is appropriate in view of the changes in the industry since

rule 7(a) was adopted in 1941.10 A company with annual utility

revenues that exceed $5 million may request an order, upon application,

declaring it not to be a utility company for purposes of the

Act.11

---------------------------------------------------------------------------

\1\0Holding Co. Act Release No. 2694 (Apr. 17, 1941) (adopting

release).

\1\1See sections 2(a)(3) and 2(a)(4) of the Act. See, e.g.,

Petrolane Gas Service Limited Partnership, Holding Co. Act Release

No. 25846, 54 SEC Docket 1389 (July 7, 1993) (distributor of propane

in enclosed portable containers with distribution sales of

approximately $16 million); AmeriGas Propane, Holding Co. Act

Release No. 25434, 50 SEC Docket 918 (Dec. 20, 1991) (distributor of

propane in enclosed portable containers with distribution sales of

approximately $16 million); Cal Gas Corp., Holding Co. Act Release

No. 24407, 38 SEC Docket 999 (June 10, 1987) (liquefied petroleum

gas marketing company with distribution sales of approximately $11

million); Enron Corp., Holding Co. Act Release No. 24428, 38 SEC

Docket 1535 (July 23, 1987) (gas transportation company with

distribution sales of approximately $5 million); LTV Steel Mining

Co., Holding Co. Act Release No. 25360, 49 SEC Docket 936 (Aug. 12,

1991) (iron ore mining company with electricity sales of

approximately $2.2 million).

---------------------------------------------------------------------------

Accordingly, the Commission is adopting the amendment substantially

as proposed.12

---------------------------------------------------------------------------

\1\2The rule, as amended, deletes an outdated reference to sales

of electricity at wholesale ``during the existence of the national

emergency.''

---------------------------------------------------------------------------

B. Rule 29: Filing of Reports to State Commissions

Rule 29(a), adopted under sections 14 and 15 of the Act, requires a

company in a registered holding company system to file with the

Commission two copies of each report submitted to stockholders.13

The Commission believes that the reporting requirement under the rule

is no longer necessary. The Commission receives copies of system

companies' annual reports to shareholders as exhibits to the Form U5S

filed by the parent company.14 System companies are also subject

to extensive disclosure requirements under the other federal securities

laws. Among other things, the companies file with the Commission

periodic reports on Forms 10-K and 10-Q and current reports on Form 8-

K, in addition to the special reports that may be required under

circumstances such as a proxy solicitation or tender offer.

---------------------------------------------------------------------------

\1\3 17 CFR 250.29(a).

\1\4See Holding Co. Act Release No. 23214, 49 FR 4717 (Feb. 8,

1984).

---------------------------------------------------------------------------

The commenters uniformly favor amendment of rule 29 to delete the

reporting requirement as it applies to shareholder reports.

Accordingly, the rule is so amended.

C. Rule 40(a)(5): Exemption of Acquisitions From Nonaffiliates

Companies in a registered system generally require prior Commission

approval, under the standards of section 10, for the acquisition of any

security.15 Rule 40(a)(5) provides a limited exemption to this

requirement for the acquisition of securities of local industrial or

other nonutility enterprises.16 Under the rule, the acquisition

cannot result in an affiliation between the system company and the

local enterprise. Further, the rule limits to $50,000 the aggregate

amount that a system company can invest each year ``for the purpose of,

and in accordance with a State law specifically relating to, promoting

the development of business and industry in such territory,'' and to

$10,000 the aggregate annual amount that a system company can invest in

other local nonutility enterprises.

---------------------------------------------------------------------------

\1\5See section 9(a) of the Act.

\1\617 CFR 250.40(a)(5). The rule was adopted under section

9(c)(3) which provides that:

[Section 9(a)] shall not apply to the acquisition by a

registered holding company, or a subsidiary thereof, of . . . such

commercial paper and other securities, within such limitations, as

the Commission may by rules and regulations or order prescribe as

appropriate in the ordinary course of business of a registered

holding company or subsidiary company thereof and as not detrimental

to the public interest or the interest of investors or consumers.

---------------------------------------------------------------------------

These dollar amounts have not been increased since the rule was

adopted more than 50 years ago. The Commission, however, has authorized

by order a number of ``good citizen'' investments in larger

amounts.17 In light of these orders, and to increase the

usefulness of the rule, the Commission proposed to remove the dollar

limit on investments pursuant to state business development laws, and

to increase to $1 million the annual limit on investments in other

local enterprises. The amended rule would exempt investments in

nonutility enterprises located in the service territory of the

acquiring public-utility company or, if the acquiring company were not

a public-utility company, in the service territory of the registered

system.

---------------------------------------------------------------------------

\1\7See, e.g., Hope Gas, Inc., Holding Co. Act Release No.

25407, 50 SEC Docket 344 (Nov. 8, 1991) (authorizing investment of

$2 million for venture capital investments pursuant to state law).

---------------------------------------------------------------------------

Upon further consideration, the Commission believes that the

proposed amendment may be overbroad as it relates to investments

pursuant to state business development laws. It does not appear

necessary at this time to provide an unlimited exception for such

investments. The rule provides a narrow exception to the requirements

of section 9(a)(1) for investments in industrial development and

similar entities. The Commission is concerned that an unbounded rule

could encourage investments unrelated to the purpose of the rule.

Accordingly, the Commission is not removing the dollar limitation but,

instead, is increasing it from $50,000 to $5 million per year for

investments pursuant to state business development laws. In addition,

the Commission is adopting the proposal to increase to $1 million

annually the limit on investments in other local enterprises.

The commenters have suggested several modifications to the proposed

amendment. Northeast asks the Commission to expand the geographic scope

to include the entire area served by the entity in which an investment

is to be made or in which the activities of the entity have an economic

impact, and to the entire state or states in which the system companies

operate. Such an expansion could encourage investments that have little

or no relationship to the system's service territory, and thus undercut

the rationale for the exemption.18 Accordingly, the Commission

declines to grant this request.

---------------------------------------------------------------------------

\1\8Without the strict geographic restriction, the rule could be

used for purposes of diversification. As noted above, a registered

holding company generally requires prior Commission approval, by

order upon application, to acquire any interest in any other

business. Among other things, such nonutility acquisitions must be

functionally related to the operations of the system's integrated

public-utility system. It is well settled that section 9(c)(3)

cannot be used to circumvent this requirement. See Michigan Consol.

Gas Co., 44 S.E.C. 361, 366 (1973), aff'd, 444 F.2d 913 (D.C. Cir.

1971) (providing that section 9(c)(3) cannot be employed to evade

the proscriptions of section 11(b)(1)).

---------------------------------------------------------------------------

CSW urges the Commission to increase to $5 million annually the

permissible aggregate investment in local enterprises that are not

organized pursuant to state business development laws. The comment

suggests that this dollar amount is necessary to provide a meaningful

stimulus in a given region. The Commission declines to adopt this

suggestion. The $1 million limit is intended to facilitate certain

limited ``good citizen'' investments. The nominal dollar amount

provides a safeguard against potential abuses. A company seeking to

engage in a transaction that is not within the terms of the rule may,

of course, seek Commission approval by order upon application.

Northeast also recommends that the Commission amend the rule to

permit an acquisition of up to 10% of the voting securities of a local

enterprise.19 Under Northeast's proposal, a regulated company

could become an affiliate or a holding company of a local business,

without the need to apply for or receive Commission approval. The

Commission declines to follow this recommendation. Rule 40(a)(5)

requires that an acquisition not result in an affiliation with the

issuer. This requirement is intended to ensure that the rule is not

used to circumvent the requirements of sections 9, 10 and 11,

consistent with the limited scope of section 9(c)(3).20 The

Commission declines to expand the scope of the rule, as requested by

Northeast.21

---------------------------------------------------------------------------

\1\9Rule 40(a)(5) provides in pertinent part that the exemption

will not apply where ``by reason of such acquisition, [the local

enterprise] will become an affiliate of the company acquiring the

securities.'' The Act defines an affiliate to include any company of

which 5% or more of the outstanding voting securities are owned by a

specified company.

\2\0Michigan Consol. Gas Co., 44 S.E.C. at 367 (acquisitions

under section 9(c)(3) have involved only ``investments in, and have

not involved ownership and control of, another business'').

\2\1The Commission's precedent under section 9(c)(3) is uniform

in this regard. See, e.g., Hope Gas, Inc., Holding Co. Act Release

No. 25407, 50 SEC Docket 344 (Nov. 8, 1991); East Ohio Gas Co.,

Holding Co. Act Release No. 25046, 45 SEC Docket 1225 (Feb. 27,

1990) (applicants represented that the registered company would not

acquire more than 5% of the securities of the subject industrial

development company).

---------------------------------------------------------------------------

The Commission is also amending Form U5S to require disclosure of

the aggregate amount of investments in entities operating in the

service territory of the registered holding company.

D. Rule 41(c): Exemption of Public-Utility Subsidiaries With Respect to

Limited Acquisition of Utility Assets

Under section 9(a)(1) of the Act, companies in a registered system

generally require Commission approval, by order upon application,

before acquiring utility assets. Rule 41(c) provides a limited

exception to this requirement for the acquisition by a system public-

utility company of electric utility assets that are, or immediately

following the transaction will be, connected with electric utility

assets that the acquiring company already owns and operates, or gas

utility assets that are located in, or adjacent to, the service area in

which the acquiring company already owns and operates gas utility

assets.22 The existing rule limits the amount of such acquisitions

to the lesser of $100,000 or 5% of the acquirer's gross utility

revenues in a given calendar year.

---------------------------------------------------------------------------

\2\217 CFR 250.41(c). Compare section 9(b)(1) (a system company

can acquire an unlimited amount of utility assets if the

acquisitions have been expressly authorized by a state commission).

Rule 41(c) was adopted under section 3(d), which authorizes the

Commission to make rules exempting companies from the obligations,

duties, or liabilities imposed on them as ``subsidiary companies''

or ``affiliates,'' as defined by the Act.

---------------------------------------------------------------------------

The proposed amendment would increase the annual limit to the

lesser of $5 million or 5% of the gross annual revenues that the

acquiring company derived from its operations as a public-utility

company during the preceding calendar year. The commenters uniformly

supported this amendment. The Commission is adopting the rule as

proposed.23

---------------------------------------------------------------------------

\2\3Item 2 of Form U5S generally requires a registered holding

company to disclose any acquisitions of ``utility plant in service

or under construction of any electric utility company or retail gas

utility company for the production, transmission or distribution of

electric energy or distribution of natural or manufactured gas.''

---------------------------------------------------------------------------

E. Rule 42(b): Acquisition, Retirement and Redemption of Securities by

the Issuer Thereof

Transactions by which a company in a registered system acquires,

retires or redeems a security of which it is the issuer (or which it

has assumed or guaranteed) generally require Commission approval by

order upon application under sections 9(a), 10 and 12(c), and rules

thereunder. At present, rule 42(b) provides a limited exemption to this

requirement.24 The proposed amendment would expand the rule to

exempt all transactions in which a system company acquires, retires or

redeems a security of which it is the issuer (or which it has assumed

or guaranteed).

---------------------------------------------------------------------------

\2\4Paragraph (b) of the present rule exempts: (1) the

retirement of treasury securities; (2) the acquisition, retirement

or redemption of any evidence of indebtedness, at maturity or

otherwise, for the consideration specifically designated therein;

(3) the acquisition, retirement or redemption of any security

pursuant to a conversion privilege; (4) the acquisition, retirement

or redemption of any evidence of indebtedness in accordance with any

indenture requirement then applicable, or in an aggregate amount

estimated not to exceed the amount of any sinking fund or other

periodic requirement for the following twelve months; (5) the

acquisition, retirement or redemption in any calendar year of not

more than two percent of the amount of a given class of securities;

and (6) the acquisition, retirement or redemption of any securities,

other than common stock, at a cost not exceeding $50,000 in any

calendar year. 17 CFR 250.42(b).

---------------------------------------------------------------------------

Under the amendment, system companies could more easily adjust

their capital ratios in response to changing economic conditions.

Commenters, citing the important role of the capital markets in

regulating the capital structures of publicly-held corporations,

uniformly support expansion of the exemption. The Commission recognizes

that rating agencies, financial institutions and state regulators play

important roles in ensuring appropriate capital ratios for public-

utility companies.25

---------------------------------------------------------------------------

\2\5In other matters, the Commission has recognized the role of

rating agencies in analyzing structured financings. See Exclusion

from the Definition of Investment Company for Structured Financings,

Investment Company Act Release No. 19105, 57 FR 56248 (Nov. 27,

1992).

---------------------------------------------------------------------------

To forestall potential abuse, the exemption remains unavailable for

affiliate transactions.26 CNG asks the Commission to modify this

exclusion to exempt the acquisition of shares of common stock pursuant

to the exchange and tax withholding provisions of an employee benefit

plan. The commenter states that the modification is necessary because

the rule, at present, does not exempt transactions with the officers

and directors of system companies, who are affiliates of such companies

within the meaning of the Act.27 The Commission declines to adopt

this recommendation. A party may continue to seek Commission approval,

by order upon application, for these types of transactions.

---------------------------------------------------------------------------

\2\6The legislative history indicates that the regulation of

intercompany transactions under section 12 was intended ``to prevent

the milking of operating companies for undue advantage to the

controlling holding company groups.'' H.R. Rep. No. 1318, 74th

Cong., 1st Sess. 17 (1935). The Senate report stated, in regard to

section 12: ``Unless appropriate discretion is given to the

Commission, new devices will spring up and may result in nullifying

the provisions of [the Act].'' S. Rep. No. 621, 74th Cong., 1st

Sess. 34 (1935).

\2\7Section 2(a)(11)(C) of the Act defines ``affiliate'' to

include officers and directors of system companies.

---------------------------------------------------------------------------

The acquisition by a registered holding company of its own

securities as part of a ``going-private'' transaction is exempt from

the requirements otherwise applicable to such transactions under the

Securities Exchange Act of 1934.28 To ensure that these

transactions do not escape review, the amended rule will not exempt

transactions within the meaning of rule 13e-3(a)(3) under the

Securities Exchange Act.29

---------------------------------------------------------------------------

\2\8See 17 CFR 240.13e-3(g)(3) (the rules that govern going-

private transactions do not apply to transactions by a registered

holding company in compliance with the requirements of the Act).

\2\9See, e.g., 17 CFR 240.13e-3(a)(3). As here relevant, rules

adopted pursuant to section 13(e)(1) of the Securities Exchange Act

impose reporting requirements on an issuer's acquisition of its own

common stock, whether in response to a tender offer [rule 13e-1], as

part of a going-private transaction [rule 13e-3], or as a self-

tender offer [rule 13e-4]. See 17 CFR 240.13e-1, 240.13e-3, 240.13e-

---------------------------------------------------------------------------

Accordingly, the Commission adopts the amendment substantially as

proposed.

F. Rule 43(b): Sales to Affiliates

Rule 43, adopted under sections 12(d) and 12(g) of the Act,

generally requires prior Commission approval for sales to an affiliate

of securities, utility assets, or any other interest in any

business.30 Under the present rule, a sale of securities is

excepted from this requirement if the acquisition is within the terms

of section 9(b)(2),31 the consideration is less than $100,000 and

the acquisition does not require Commission approval,32 or the

transaction involves the sale of securities of a subsidiary service

company.33 The proposed amendment would create a single class of

exemptions for sales to affiliates of securities, utility assets, or

any other interests in any business up to a total annual aggregate

consideration of $5 million when the acquisition does not require

Commission approval.34

---------------------------------------------------------------------------

\3\017 CFR 250.43.

\3\1Section 9(b)(2) provides an exemption from section 9(a) for

the acquisition by a public-utility company of the securities of its

subsidiary public-utility company in a wholly intrastate holding

company system.

\3\2Rule 41(c) provides an exemption for limited acquisitions of

utility assets. Any sales corresponding to these exempt acquisitions

would also be exempt under rule 43(b), as amended. Further, rules 40

and 42 provide exemptions for limited acquisitions of nonutility

interests and for an issuer's acquisition of its own securities,

respectively, while rule 52 exempts certain security issuances and

acquisitions.

\3\3A service company is a subsidiary company of a registered

holding company that performs services or construction for, or sells

goods to, an associate company.

\3\4Acquisitions not subject to Commission approval would

include, for example, an acquisition of utility assets within the

exemption provided by section 9(b) or 9(c), or rule 41.

---------------------------------------------------------------------------

The Commission believes that existing reporting requirements under

the Act should guard against potential abuses.35 The commenters

generally favor the proposed amendment.36 CNG asks whether the

dollar limitation applies to each transaction or the annual aggregate

amount of such transactions. The $5 million limit is intended as an

annual aggregate maximum amount for all transactions under the rule.

CNG also seeks an additional exemption for intrasystem transactions

when the acquisition is otherwise subject to approval of the

Commission. The Commission does not perceive the need for such an

exemption. The rule, therefore, is adopted substantially as proposed.

---------------------------------------------------------------------------

\3\5Form U5S requires annual reporting of sales in excess of $1

million of ``utility plant in service or under construction of any

electric utility company or retail gas utility company for the

production, transmission or distribution of electric energy or

distribution of natural or manufactured gas.''

A registered holding company also must report ``issuances, sales

or pledges of securities of system companies or guaranty or

assumption by system companies of securities of other persons,

including system companies or exempted subsidiaries, stating the

name of the issuer, the name of the system company if different,

describing the securities, the date and form of the transaction, the

consideration and the exemption claimed.'' Id.

\3\6The commenters cited the protections afforded by existing

state and federal law, together with the reporting requirement of

Form U5S under the Act, as safeguards for the interests of investors

and consumers.

A registered holding company also must report ``issuances, sales

or pledges of securities of system companies or guaranty or

assumption by system companies of securities of other persons,

including system companies or exempted subsidiaries, stating the

name of the issuer, the name of the system company if different,

describing the securities, the date and form of the transaction, the

consideration and the exemption claimed.'' Id.

---------------------------------------------------------------------------

G. Rule 44(b): Sales of Securities and Assets

Rule 44, adopted under section 12(d) of the Act, governs sales of

utility securities or utility assets by a registered holding company to

any person.37 The rule, at present, exempts four classes of such

sales from the general requirement of Commission approval by order upon

application. The proposed amendment would replace the existing

exemptions with a single one that would exempt all sales up to an

annual aggregate amount of $5 million where the acquisition of the

securities or assets does not require Commission approval. The

Commission believes that existing reporting requirements under the Act

offer a safeguard against potential abuses. The commenters generally

support this amendment. Accordingly, the rule is amended.

---------------------------------------------------------------------------

\3\717 CFR 250.44.

---------------------------------------------------------------------------

H. Rule 50: Requirement of Public Invitation of Proposals for the

Purchase or Underwriting of Securities

The Commission is rescinding rule 50.38 The rule, which

established a requirement of competitive bidding with respect to the

issuance or sale of securities by a registered holding company or its

subsidiary, was intended to prevent abuses in the issue and sale of

securities. In practice, many system companies relied upon various

exceptions to this requirement. The Commission believes that the rule

is no longer necessary in view of the extensive reporting requirements

imposed by the Act and the other federal securities laws. In addition,

unless otherwise exempted, the underlying financing will remain subject

to Commission review.39 Rescission of the rule will permit

companies in a registered holding company system to choose the

marketing method that offers the most advantageous terms. The

commenters strongly support this proposal.40 The rule is hereby

rescinded.

---------------------------------------------------------------------------

\3\817 CFR 250.50.

\3\9In particular, the Commission must consider, under section

7(d)(4) of the Act, whether the fees or other remuneration paid in

connection with the issue, sale or distribution of a security are

reasonable. Rule 52 (17 CFR 250.52) provides a limited exemption for

the issuance and sale of certain securities by public-utility

companies in a registered system. A company seeking to rely upon

rule 52 must report, on Form U-6B-2, the terms and conditions of

such transaction.

\4\0CNG expressed concern that rescission of the rule would

eliminate the option to bid securities competitively and thus

endanger a company's ability to rely upon rule 415 under the

Securities Act of 1933, the ``shelf-registration'' rule. The

elimination of the requirement of competitive bidding does not

affect a registered holding company's ability to offer securities

subject to a competitive process. In addition, the Commission notes

that the availability of rule 415 under the Securities Act depends

on the type of securities that are to be offered, not the

competitive bidding requirements of rule 50. Indeed, rule 50 had

been amended to allow for shelf registration by registered holding

companies. See Holding Co. Act Release No. 22623, 47 FR 39810 (Sept.

2, 1982).

---------------------------------------------------------------------------

I. Rule 65: Expenditures in Connection With Solicitation of Proxies

Rule 65, adopted under section 12(i) of the Act, generally requires

prior Commission approval for certain expenditures in connection with

the solicitation of proxies by a company in a registered system.41

The rule currently provides an exemption for annual aggregate

expenditures of $1,000. The proposed amendment would increase the

annual exemption to $100,000.

---------------------------------------------------------------------------

\4\117 CFR 250.65.

---------------------------------------------------------------------------

The commenters generally support this proposal. Columbia, however,

asks the Commission to rescind the rule. The commenter notes that

regulated companies are already subject to the proxy solicitation rules

under the Securities Exchange Act of 1934,42 and contends that

there are no current abuses that justify the additional restrictions

under the Act.43 Northeast asks the Commission to amend the rule

to require only that proxy solicitations be conducted in conformity

with the Commission's proxy rules.

---------------------------------------------------------------------------

\4\2Proxy solicitations and related expenses are subject to

Commission review under the Securities Exchange Act of 1934 [15

U.S.C. Secs. 78a-78ll] and rules thereunder [17 CFR 240.14a-1-

240.14f-1].

\4\3Columbia at 4-5. The commenter also asserted that the

requirements of rule 65 are inconsistent with recent amendments to

the Commission's proxy rules that decrease regulation of

communications among shareholders. See Securities Exchange Act

Release No. 34-31326, 57 FR 48276 (Oct. 22, 1992) (adopting

amendments to the proxy rules).

---------------------------------------------------------------------------

Both the proxy rules and rule 65 require the disclosure of the

identity of paid solicitors and the cost of the solicitations.44 A

proposal to rescind rule 65 may be an appropriate subject for a future

rulemaking. In the meantime, however, the rule is amended as proposed.

---------------------------------------------------------------------------

\4\4See 17 CFR 240.14a-101, item 4. For solicitations not

subject to election contests, item 4(a) provides, in pertinent part,

(2) If the solicitation is made otherwise than by the

registrant, so state and give the names of the participants in the

solicitation * * *.

(3) * * * If the solicitation is to be made by specially engaged

employees or paid solicitors, state (i) the material features of any

contract or arrangement for such solicitation and identify the

parties, and (ii) the cost or anticipated cost thereof.

(4) State the names of the persons by whom the cost of the

solicitation has been or will be borne, directly or indirectly.

For solicitations subject to election contests, item 4(b)

provides, in pertinent part,

(1) State by whom the solicitation is made and describe the

methods employed and to be employed to solicit security holders.

(2) If regular employees of the registrant or any other

participant in a solicitation have been or are to be employed to

solicit security holders, describe the class or classes of employees

to be so employed, and the manner and nature of their employment for

such purpose.

(3) If specially engaged employees, representatives or other

persons have been or are to be employed to solicit security holders,

state (i) the material features of any contract or arrangement for

such solicitation and the identity of the parties, (ii) the cost or

anticipated cost thereof, and (iii) the approximate number of such

employees or employees of any other person (naming such other

person) who will solicit security holders.

(4) State the total amount estimated to be spent and the total

expenditures to date for, in furtherance of, or in connection with

the solicitation of security holders.

(5) State by whom the cost of the solicitation will be borne. *

* *

Compare Holding Co. Act Release No. 2681 (Apr. 9, 1941) (rule 65

was intended to ``prevent substantial expenditures of corporate

funds by the management of a registered holding company to employ

solicitors to aid them in obtaining proxies in a contested

election'').

---------------------------------------------------------------------------

J. Rule 71: Statements To Be Filed Pursuant to Section 12(i) of the Act

Under section 12(i) of the Act, persons employed or retained by any

registered holding company or its subsidiary, who engage in activities

before Congress, the Federal Energy Regulatory Commission (``FERC'') or

the Commission, must disclose the nature and character of their

employment and related compensation. Rule 71(a) currently requires a

report on Form U-12(I)-A within 10 days of the date of such

activities.45 Rule 71(b) permits the filing of an advance

statement on Form U-12(I)-B covering anticipated activities for the

remainder of the calendar year. The proposed amendment would lengthen

the advance statement period to three years.

---------------------------------------------------------------------------

\4\517 CFR 250.71(a).

---------------------------------------------------------------------------

The commenters generally support the amendment. CNG asks the

Commission to clarify the types of persons that are required to file

under the rule. In general, support staff, such as secretarial staff,

are not subject to the filing requirement, in contrast to officers and

attorneys who represent the companies.46

---------------------------------------------------------------------------

\4\6See, e.g., SEC v. Morgan, Lewis & Bockius, 209 F.2d 44 (9th

Cir. 1953) (attorneys representing holding companies before the

Commission in a matter affecting a registered holding company are

required to file under rule 71).

---------------------------------------------------------------------------

Columbia suggests that the Commission exempt from filing all

regular employees in the holding company whose expenses do not exceed

$30,000 per year. By its terms, however, section 12(i) does not appear

to permit a de minimis exemption.47 The Commission therefore

declines to adopt this suggestion. Accordingly, the rule is adopted as

proposed.

---------------------------------------------------------------------------

\4\7 Section 12(i) requires the filing of forms with the

Commission with respect to individuals who ``present, advocate, or

oppose any matter.''

---------------------------------------------------------------------------

K. Rule 83: Exemption in the Case of Transactions With Foreign

Associates

Section 13 of the Act requires that service, sales and construction

contracts be performed economically and efficiently for the benefit of

associate companies at cost, fairly and equitably allocated among the

companies.

Under rule 83(d), any subsidiary company can perform service, sales

and construction contracts for a foreign associate company without

complying with the standards of section 13(b), and without the need to

apply for, and receive, prior Commission approval, so long as the

aggregate cost of such contracts does not exceed $10,000

annually.48 The Commission proposed to amend the rule to extend

the exemption to all transactions, at not less than cost, with foreign

associate companies.

---------------------------------------------------------------------------

\4\8 17 CFR 250.83(d).

---------------------------------------------------------------------------

The Commission had believed that the pricing requirement under the

proposed amended rule would provide an adequate safeguard against

abuse. A question has arisen, however, whether the rule would protect

against a diversion of management and other expertise away from the

needs of the system's core utility operations. The Commission will

consider these issues in a companion rulemaking involving a proposed

amendment to rule 87.49 Accordingly, the Commission is deferring

action for further consideration of the proposed amendment to rule 83.

---------------------------------------------------------------------------

\4\9 The Commission proposed to amend rule 87 to clarify the

requirement of prior approval, by order upon application, for

service, sales or construction contracts involving an exempt

wholesale generator or foreign utility company and an associate

company. See Holding Company Act Release No. 25887, International

Series Release No. 584 (Sept. 23, 1993), 58 FR 51508 (Oct. 1, 1993).

---------------------------------------------------------------------------

L. Uniform System of Accounts and Form U-13-60: Annual Report for

Mutual and Subsidiary Service Companies

The Commission is deferring action on a proposed amendment to the

annual report form for mutual and subsidiary service companies, Form U-

13-60.50 The proposed amendment was intended to harmonize the

Commission's Uniform System of Accounts for Mutual and Subsidiary

Service Companies and the FERC's standard accounts for utility

companies.

---------------------------------------------------------------------------

\5\0 See Holding Co. Act Release No. 1858 (Dec. 29, 1939)

(adopting Form U-13-60); Holding Co. Act Release No. 21447 (Feb. 22,

1980) (amendment). The Uniform System of Accounts are found in 17

CFR 256.

---------------------------------------------------------------------------

Most commenters expressed confusion as to the proposed changes and

the degree of flexibility they would afford. These commenters asked the

Commission to clarify its proposal. In light of these comments, the

Commission has decided to defer action to enable it to consider the

matter more closely.

M. Other Matters

Finally, the Commission is amending or deleting obsolete language

in certain rules, including references to the Federal Power Commission,

the Atomic Energy Commission and the Bankruptcy Act.51

---------------------------------------------------------------------------

\5\1 See, e.g., 17 CFR 250.7, 250.26, 250.27, 250.49, 250.52,

250.62, 250.63.

---------------------------------------------------------------------------

II. Summary of the Final Regulatory Flexibility Analysis

The Commission has prepared a Final Regulatory Flexibility Analysis

in accordance with section 603 of the Regulatory Flexibility Act, 5

U.S.C. 603, regarding the amendment to rule 7. The Analysis explains

that the amendment is intended to expand the exemption from regulation

for companies that are primarily engaged in nonutility businesses. The

Analysis describes the present regulatory framework under which a

company operating public-utility facilities must obtain a Commission

order declaring it not to be an electric or gas utility company, unless

the gross sales of electric energy, or of natural or manufactured gas

distributed at retail by means of the facilities owned or operated by

such company, did not exceed $100,000 during the previous calendar

year. The exemption by order is not available for companies that own

but do not operate such facilities. The amendment would increase the

dollar sales allowable under the exemption to $5 million. The Analysis

states that several significant alternatives to the amendment were

considered, including continuing to grant exemptions by order on a

case-by-case basis, but concludes that the amendment provides the least

impact on, or cost to, small businesses. A copy of the Final Regulatory

Flexibility Analysis may be obtained from Brian P. Spires, at Mail Stop

10-6, Securities and Exchange Commission, 450 5th Street, N.W.,

Washington, D.C. 20549.

The other rule and form amendments will not affect any small

entities as defined in rule 110. Pursuant to section 605(b) of the

Regulatory Flexibility Act, 5 U.S.C. 605(b), the Chairman of the

Commission has certified that the amended rules would not have a

significant economic impact on a substantial number of small entities.

The Commission did not receive any comments with respect to the

Chairman's certification.

III. Cost/Benefit of Proposed Actions

The amendments will decrease regulatory compliance costs for

companies in a registered holding company system. In fiscal year 1993,

for example, the amendments would have eliminated the need for 22

applications and approximately 545 forms, and would have reduced the

regulatory burden associated with an additional 86 applications, for an

estimated savings of more than 4,114 hours per year. Moreover, the

amendments would have reduced by approximately 1,576 hours the staff

time associated with reviewing and analyzing these applications. The

only cost to the companies complying with the amended rules will be the

cost of reporting on Form U5S the information required by rule

40(a)(5). It is estimated that no more than one-half hour will be

required to complete the additional information required by the change

to Form U5S.

IV. Paperwork Reduction Act

The Office of Management and Budget has approved the amended rules

and forms for continued use through December 31, 1995 and February 28,

1996 (Control No. 3235-AF68).

V. Statutory Authority

Commission is amending rule 7 pursuant to sections 2(a)(3), 2(a)(4)

and 20(a) [15 U.S.C. Secs. 79b(a)(4), 79b(a)(4), 79t(a)] of the Act;

amending rule 26 pursuant to section 20(a) [15 U.S.C. Sec. 79t(a)] of

the Act; amending rule 27 pursuant to section 20(a) [15 U.S.C.

Sec. 79t(a)] of the Act; amending rule 29 pursuant to sections 14, 15

and 20(a) [15 U.S.C. Secs. 79n, 79o, 79t(a)] of the Act; amending rule

40(a)(5) and Form U5S pursuant to sections 3(d), 5(c), 9(c)(3), 14 and

20(a) [15 U.S.C. Secs. 79c(d), 79e(c), 79i(c)(3), 79n, 79t(a)] of the

Act; amending rule 41(c) pursuant to section 3(d) [15 U.S.C.

Sec. 79c(d)] of the Act; amending rule 42 pursuant to section 9(c)(3),

12(c) and 20(a) [15 U.S.C. Secs. 79i(c)(3), 79l(c), 79t(a)] of the Act;

amending rule 43(b) pursuant to sections 6(b), 12(d), 12(f) and 27(a)

[15 U.S.C. Secs. 79f(b), 79l(d), 79l(f), 79aa(a)] of the Act; amending

rule 44(b) pursuant to section 12(d) [15 U.S.C. Sec. 79l(d)] of the

Act; amending rule 49 pursuant to section 20(a) [15 U.S.C. Sec. 79t(a)]

of the Act; rescinding rule 50 pursuant to section 20(a) [15 U.S.C.

Sec. 79t(a)] of the Act; amending rule 52 pursuant to section 20(a) [15

U.S.C. Sec. 79t(a)] of the Act; amending rule 62 pursuant to section

20(a) [15 U.S.C. Sec. 79t(a)] of the Act; amending rule 63 pursuant to

section 20(a) [15 U.S.C. Sec. 79t(a)] of the Act; amending rule 65

pursuant to sections 12(e) and 20(a) [15 U.S.C. Secs. 79l(e), 79t(a)]

of the Act; and amending rule 71(b) and Forms U-12(I)-A and U-12(I)-B

pursuant to section 12(i) and 20(a) [15 U.S.C. Secs. 79l(i), 79t(a)] of

the Act. The authority citations for these actions precede the text of

the actions.

VI. Text of Rule and Form Amendments

List of Subjects in 17 CFR Parts 250 and 259

Utilities.

For the reasons set out in the preamble, the Commission is amending

Chapter II, Title 17 of the Code of Federal Regulations as follows:

PART 250--GENERAL RULES AND REGULATIONS, PUBLIC UTILITY HOLDING

COMPANY ACT OF 1935

1. The authority citation for Part 250 continues to read as

follows:

Authority: 15 U.S.C. 79c, 79f(b), 79i(c)(3), 79t, unless

otherwise noted.

2. The authority citations at the end of the following sections are

removed: 250.7, 250.26, and 250.29.

3. Section 250.7 is amended by removing ``Atomic Energy

Commission'' in paragraphs (b)(2)(i) and (b)(3)(i) and adding in its

place ``Nuclear Regulatory Commission'' and by revising paragraph (a)

to read as follows:

Sec. 250.7 Companies deemed not to be electric or gas utility

companies.

(a) Any company which is primarily engaged in one or more

businesses other than the business of an electric or gas utility

company, shall not be deemed an electric or gas utility company within

the meaning of section 2(a)(3) or section 2(a)(4) of the Act if the

gross sales of electric energy, or of natural or manufactured gas

distributed at retail by means of the facilities owned or operated by

such company, did not exceed an average annual amount of $5,000,000

over the preceding three calendar years. There may be excluded from the

gross sales specified:

(1) Sales of electric energy or natural or manufactured gas to

tenants or employees of the operating company for their own use and not

for resale; and

(2) Sales of gas to industrial consumers or in enclosed portable

containers.

* * * * *

Sec. 250.26 [Amended]

4. Section 250.26 is amended by removing ``Federal Power

Commission'' each time it appears in paragraph (b)(2), and adding in

its place ``Federal Energy Regulatory Commission''.

Sec. 250.27 [Amended]

5. Section 250.27 is amended by removing ``Federal Power

Commission'' each time it appears in paragraph (a), and adding in its

place ``Federal Energy Regulatory Commission''.

6. Section 250.29 is revised to read as follows:

Sec. 250.29 Filing of Reports to State Commissions.

Preliminary Note: Reports to State Commissions shall be submitted

to the Commission in paper only, whether or not the filer is otherwise

required to file in electronic format.

A copy of each annual report submitted by any registered holding

company or any subsidiary thereof to a State Commission covering

operations not reported to the Federal Energy Regulatory Commission

shall be filed with the Securities and Exchange Commission no later

than ten days after such submission.

7. Section 250.40 is amended by revising paragraph (a)(5) to read

as follows:

Sec. 250.40 Exemption of certain acquisitions from nonaffiliates.

(a) * * *

(5) Securities of local enterprises. Any security issued by an

industrial or other nonutility enterprise located in the service

territory of the acquiring public-utility company or, if the acquiring

company is not a public-utility company, in the service territory of

the registered holding-company system: Provided,

(i) The total cost of acquisitions by the acquiring company of

securities of industrial development companies organized for the

purpose of, and in accordance with a State law that specifically

relates to, promoting the development of business and industry in such

state does not exceed an annual aggregate amount of $5 million, and

(ii) The total cost of acquisitions of securities of other local

industrial or nonutility enterprises does not exceed an annual

aggregate amount of $1 million. In no event, however, will the above

exemption apply where, by reason of such acquisition, the acquiring

company would become an affiliate of the issuer.

* * * * *

8. Section 250.41 is amended by revising paragraph (c) to read as

follows:

Sec. 250.41 Exemption of public utility subsidiaries with respect to

limited acquisition of utility assets.

* * * * *

assets acquired pursuant to the exemption granted by this section does

not exceed in any calendar year the lesser of $5 million or five

percent of the gross annual revenues of the acquiring company derived

from its operations as a public-utility company during the preceding

calendar year.

* * * * *

9. Section 250.42 is revised to read as follows:

Sec. 250.42 Acquisition, retirement and redemption of securities by

the issuer thereof.

A registered holding company or its subsidiary company may acquire,

retire or redeem any security of which it is the issuer (or which it

has assumed or guaranteed) without the need for prior Commission

approval under sections 9(a), 10 and 12(c) of the Act: Provided, This

section shall not apply to a transaction by a registered holding

company or its subsidiary company with an associate company, an

affiliate, or an affiliate of an associate company, or to a transaction

by a registered holding company, as defined in Sec. 240.13e-3(a)(3) of

this chapter.

10. Section 250.43 is amended by revising paragraph (b) to read as

follows:

Sec. 250.43 Sales to affiliates.

* * * * *

(b) Exception. The foregoing requirement in paragraph (a) shall not

apply to any sale of securities or utility assets or any other interest

in any business in an aggregate amount of up to $5,000,000 during any

calendar year if the acquisition of such securities, assets or other

interest does not require prior Commission approval.

11. Section 250.44 is amended by revising paragraph (b) to read as

follows:

Sec. 250.44 Sales of securities and assets.

* * * * *

(b) Exception. The foregoing requirement in paragraph (a) shall not

apply to any sale of securities or of utility assets in an aggregate

amount of up to $5,000,000 during any calendar year if the acquisition

of such securities or assets does not require prior Commission

approval.

* * * * *

Sec. 250.49 [Amended]

12. Section 250.49 is amended by revising the phrase ``section 208

of Chapter X of the Bankruptcy Act, as amended (52 Stat. 894; 11 U.S.C.

608)'' in paragraph (c) to read ``section 1109(a) of Chapter 11 of the

Bankruptcy Code (11 U.S.C. 1109(a))'' and by removing the clauses

``section 106(13) of said Chapter X (52 Stat. 883; 11 U.S.C. 506), or

of'' and ``section 106.(13) of said Chapter X or of'' where they appear

in paragraph (c).

Sec. 250.50 [Removed and Reserved]

13. Section 250.50 is removed and reserved.

Sec. 250.52 [Amended]

14. Section 250.52 is amended by removing the phrase ``paragraph

(d)'' in paragraph (c) and replacing it with ``paragraph (c).''

Sec. 250.62 [Amended]

15. Section 250.62 is amended by removing the phrase ``or by a

confirmed telegram'' in paragraph (d)(2), and removing the phrase ``or

telegraphic'' in paragraph (d)(3).

Sec. 250.63 [Amended]

16. Section 250.63 is amended by revising the phrase ``section 208

of Chapter X of the Bankruptcy Act as amended (52 Stat. 894; 11 U.S.C.

608)'' to read ``section 1109(a) of Chapter 11 of the Bankruptcy Code

(11 U.S.C. 1109(a))''.

17. Section 250.65 is amended by revising paragraph (b)(2) to read

as follows:

Sec. 250.65 Expenditures in connection with solicitation of proxies.

* * * * *

(b) Exceptions. * * *

(2) Other expenditures not in excess of $100,000 during any one

calendar year.

* * * * *

18. Section 250.71 is amended by revising the section heading and

paragraph (b) to read as follows:

Sec. 250.71 Statements to be filed pursuant to section 12(i).

* * * * *

(b) Advance statement. An advance statement, covering anticipated

activity for the remainder of the present calendar year, and the next

two calendar years, may be filed on Form U-12(I)-B by any person

(whether or not the compensation of such person has been fixed in

advance) who is a salaried officer or employee or an attorney,

accountant or other expert regularly retained by any company or by

companies in the same holding-company system, or any person specially

retained in connection with a particular proceeding or enterprise which

is expected to involve a series of appearances or activities, if such

employment or retainer does not contemplate any expenses other than

ordinary personal, traveling or sustenance expenses, stationery,

postage, telephone, telecopier and telegraphic service, stenographic

and clerical assistance, expenditures for the printing of briefs or

other documents to be submitted to any agencies specified in section

12(i) of the Act, and similar items.

* * * * *

PART 259--FORMS PRESCRIBED UNDER THE PUBLIC UTILITY HOLDING COMPANY

ACT OF 1935

19. The authority citation for Part 259 continues to read as

follows:

Authority: 15 U.S.C. 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q,

79t.

Subpart A--Forms for Registration and Annual Supplements

20. Form U5S (referenced in Sec. 259.5s) is amended by revising

paragraph 1 of Item 5 to read as follows:

Note: These amendments and the forms do not appear in the Code

of Federal Regulations.

Form U5S

* * * * *

Item 5. Investments in Securities of Nonsystem Companies

* * * * *

1. Aggregate amount of investments in persons operating in the

retail service area of the owner, or of its subsidiaries. State the

number of persons included and describe generally the kind of persons

included. If investments were made pursuant to State law, cite the

State law under which they were made.

* * * * *

Subpart C--Forms for Statements and Reports

21. Form U-12(I)-A (referenced in Sec. 259.212a) is amended by

revising paragraph (b) of rule U-71 to read as follows:

Form U-12(I)-A

* * * * *

Statements to Be Filed Pursuant to Section 12(i)

* * * * *

(b) Advance Statement. An advance statement, covering anticipated

activity for the remainder of the present calendar year and the next