Exemption of Issuance and Sale of Certain Securities by Public Utility and Nonutility Subsidiary Companies of Registered Public Utility Holding Companies; Exemption of Acquisition by Companies in a Registered Public Utility Holding Company System of Certain Securities of Associate Companies; Exemption of Capital Contributions and Open Account Advances, Without Interest, by Parent Companies to Subsidiary Companies

SUMMARY: The Commission is amending rule 52, which exempts certain

financing transactions involving the securities of the public utility

subsidiary companies of a registered public utility holding company

from the requirement of prior Commission approval under the Public

Utility Holding Company Act of 1935 (``Act''). As amended, the rule

will exempt certain additional types of securities, and will exempt the

issuance and sale of certain types of securities of nonutility

subsidiary companies of a registered holding company in connection with

routine financing transactions. The Commission is also amending rule

45(b)(4) to exempt from the requirement of prior Commission

authorization under section 12(b) of the Act and rule 45(a) all capital

contributions and open account advances by a parent company to its

subsidiary company. These amendments are intended to eliminate

unnecessary regulatory and paperwork burdens associated with seeking

Commission approval for routine financings by registered holding

companies and their subsidiary companies.

EFFECTIVE DATE: June 28, 1995. These amended rules are substantive

rules that grant an exemption or relieve restrictions.\1\

\1\ 5 U.S.C. 553(d)(1).

FOR FURTHER INFORMATION CONTACT: William C. Weeden, Associate Director,

Joanne C. Rutkowski, Assistant Director, or Bonnie Wilkinson, Staff

Attorney, all at (202) 942-0545, Office of Public Utility Regulation,

Division of Investment Management, Securities and Exchange Commission,

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450 Fifth Street, NW, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: Rule 52 (17 CFR 250.52) exempts from the

requirement of prior Commission approval under section 6(a) the

issuance and sale of certain specified types of securities by a public

utility subsidiary of a registered holding company, subject to the

terms and conditions of the rule. Rule 52 also exempts from the

requirement of prior Commission authorization under section 9(a) the

acquisition by a parent holding company of the securities issued by an

existing public utility subsidiary pursuant to the rule. The Commission

is amending rule 52 to broaden the types of debt securities that may be

issued in reliance upon the exemption and to make the exemption

available to nonutility subsidiaries of a registered holding company in

connection with routine financing transactions. The Commission is also

amending rule 45 (17 CFR 250.45) to exempt from the requirement of

prior Commission authorization under section 12(b) of the Act and rule

45(a) capital contributions and open account advances by a parent

company to its subsidiary companies. The Commission proposed these

amendments by release issued on July 7, 1992.\2\

\2\ Holding Co. Act Release No. 25574 (July 7, 1992), 57 FR

31156 (July 14, 1992) (``Proposing Release'').

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In a companion release published today in the Federal Register, the

Commission is inviting public comment on a further amendment to rule 52

that would extend the exemption to all types of securities issued in

connection with routine financing transactions, provided that the

conditions of the rule are met. The Commission is also proposing a

conforming change to rule 45.

Discussion

Rule 52 exempts from the requirement of prior Commission

authorization under section 6(a) the issue and sale of certain

specified types of securities by public utility subsidiary companies of

registered holding companies.\3\ The rule also exempts from the

requirement of prior Commission authorization under section 9(a)(1) the

acquisition by a company in a registered system of any securities

issued by an existing public utility subsidiary pursuant to the

rule.\4\

\3\ Section 6(a) requires Commission approval under the

standards of section 7 for the issue and sale of any security of a

registered holding company or its subsidiary company.

Section 6(b) authorizes the Commission to exempt from the

requirements of section 6(a):

the issue or sale of any security by any subsidiary company of a

registered holding company, if the issue and sale of such security

are solely for the purpose of financing the business of such

subsidiary company and have been expressly authorized by the State

commission of the State in which such subsidiary company is

organized and doing business.

Congress intended ``to exempt the issue of securities by

subsidiary companies in cases where holding company abuses are

unlikely to exist.'' H.R. Conf. Rep. No. 1903, 74th Cong., 1st Sess.

66-67 (1935). See generally Holding Co. Act Release No. 25058 (Mar.

19, 1990), 55 FR 11362 (Mar. 28, 1990) (adopting rule 52), and

Holding Co. Act Release No. 25573 (July 7, 1992), 57 FR 31120 (July

14, 1992) (amending rule 52).

\4\ Section 9(a)(1) in pertinent part requires prior approval

under the standards of section 10 for an acquisition of securities

by a registered holding company or its subsidiary company. Section

9(c)(3) provides a limited exception from this requirement for the

acquisition 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.

The exemption under rule 52 does not apply to the issuance of

securities to form a new public utility subsidiary of a registered

holding company. See rule 52(c).

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At present, the rule applies only with respect to the issuance of

common stock, preferred stock, mortgage bonds and notes issued to a

parent holding company, where the interest rate and maturity date of

the note is designed to parallel a debenture or preferred stock issued

by the parent. The issue and sale of such securities must be solely for

the purpose of financing the business of the public utility company,

and the relevant state commission must have expressly authorized the

financing transactions.

Rule 45 prohibits registered holding companies and their

subsidiaries from lending or extending credit to, indemnifying, or

making any donation or capital contribution to a company in the same

holding company system, except in specified circumstances.\5\ The rule

provides exceptions from the general provision, including an exception

under rule 45(b)(4) for capital contributions or open account advances

without interest to any subsidiary in an [[Page 33635]] aggregate

amount of up to $50,000 in any calendar year, after deducting payments

during the year.

\5\ Rule 45 was adopted under section 12(b), which provides

that:

It shall be unlawful for any registered holding company or

subsidiary company thereof, by use of the mails or any means or

instrumentality of interstate commerce, or otherwise, directly or

indirectly, to lend or in any manner extend its credit to or

indemnify any company in the same holding-company system in

contravention of such rules and regulations or orders as the

Commission deems necessary or appropriate in the public interest or

for the protection of investors or consumers or to prevent the

circumvention of the provisions of this title or the rules,

regulations, or orders thereunder.

Rule 45(a) requires the filing of a declaration and an order of

the Commission permitting the declaration to become effective in

order for a registered holding company or its subsidiary to engage

in these transactions.

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On July 7, 1992, the Commission proposed amendments to rules 52 and

45(b)(4) under the Public Utility Holding Company Act of 1935 (15

U.S.C. 79 et seq.).\6\ The amendments would (a) broaden the types of

debt securities that may be issued by public utility subsidiaries in

reliance upon rule 52, (b) extend the exemption under rule 52 to

nonutility subsidiaries of registered holding companies, (c) revise the

conditions of rule 52 applicable to intrasystem loan transactions, and

(d) remove the annual dollar limitation from rule 45(b)(4).

\6\ See the Proposing Release.

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The Commission received comments submitted by or on behalf of seven

registered holding companies \7\ and by the Council of the City of New

Orleans and the National Association of Regulatory Utility

Commissioners (``NARUC''). While the registered holding companies

generally support adoption of the proposed amendments, New Orleans and

NARUC generally oppose the amendments. New Orleans urged that, in the

event the amendments are adopted, several additional conditions,

including incorporation of a consolidated debt/equity ratio applicable

to sales of securities by nonutility subsidiaries, should be included.

The Commission had invited comment on the need for such a limitation in

its notice of proposed rulemaking. The objections of New Orleans and

NARUC are discussed in greater detail in section 5, below.

\7\ The registered holding companies submitting comments were

American Electric Power Company, Inc., Allegheny Power System, Inc.

(``APS''), Consolidated Natural Gas Company (``CNG''), Central and

South West Corporation (``CSW''), Eastern Utilities Associates,

General Public Utilities Corporation (``GPU''), and New England

Electric System.

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1. Issue and Sale of Securities by Public Utility Subsidiaries

Rule 52 currently exempts the issue and sale by a public utility

subsidiary of any common stock, preferred stock, mortgage bond or note

issued to a parent holding company. The rule currently has limited

usefulness. With respect to intrasystem loan transactions, the

exemption is available only for notes issued to a parent holding

company with interest rates and maturity dates that parallel those of

the holding company's debentures or preferred stock. This condition

prevents the use of the exemption in connection with other common forms

of intrasystem financing, such as unsecured short-term and long-term

loans, money pool arrangements, and the like, the terms of which are

not matched to an actual debenture or preferred stock issued by the

acquiring company.8 In addition, because none of the registered

electric utility holding companies currently issues debentures and

preferred stocks, their subsidiaries do not benefit from the exemption

at all in connection with down-stream loans. The Commission proposed to

amend the rule to extend the exemption to all types of debt

instruments, including bonds, notes and other forms of indebtedness

issued by the subsidiary, having interest rates and maturities designed

to parallel the effective cost of capital of the purchaser.9 All

of the holding companies submitting comments support a change that

would extend the benefits of rule 52 to all types of indebtedness.

\8\ As noted in the Proposing Release, the omission of common

intrasystem financing transactions is of particular concern to the

registered gas systems. Unlike registered electric systems, these

systems typically issue and sell debt to the public at the parent

company level and fund their subsidiaries' operations by means of

capital contributions, open account advances, money pool

arrangements, purchases of common stock, and short- and long-term

loans.

\9\ The Commission noted that it has permitted numerous

declarations to become effective for the issuance and sale of such

securities on this basis. See, e.g., Consolidated Natural Gas Co.,

Holding Co. Act Release No. 25339 (June 28, 1991), 49 SEC Docket 449

(July 16, 1991), and Holding Co. Act Release No. 25110 (June 29,

1990), 46 SEC Docket 1124 (July 17, 1990) (cost to subsidiaries of

borrowing from parent registered holding company tied to Federal

Funds' rate for short-term debt and published bond index for long-

term debt).

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The Commission believes it is appropriate to expand the exemption

of rule 52 to include all types of debt securities 10 that may be

issued by utility subsidiaries, as proposed. The Commission believes

that this expanded exemption is appropriate in view of the continuing

requirement of express approval by the state commission of the state in

which the public utility is organized and doing business. In 1935, few

states exercised jurisdiction over public utility financing. Today,

most do, although the extent of such jurisdiction varies

greatly.11 Rule 52 will not apply to utility financings if a state

does not regulate financing, nor to a utility in a state which

regulates securities sales generally if such state chooses not to

regulate a particular type of security, such as short-term debt. CSW

and CNG ask the Commission to interpret section 6(b) to permit an

extension of the exemption under rule 52 to utility debt issuances

where the relevant state government has determined that such issuances

need not be reviewed by the state utility commission. Similarly, GPU

suggests an expansion of rule 52 to guaranties issued by a holding

company where no state commission approval is required. The Commission

declines to adopt these suggestions, as section 6(b) does not appear to

offer a basis for such action.

\10\ In the Proposing Release, the Commission sought comment on

whether rule 52 should be extended to cover guaranties. However, the

rule as amended today will specifically exclude guaranties. As

discussed below, the Commission is requesting comment in a companion

release to be published today on the question of whether rule 52

should be further amended to cover issuance of all types of

securities, including guaranties.

\11\ See National Association of Regulatory Utility

Commissioners Compilation of Utility Regulatory Policy in the United

States and Canada, 1993-94 Compilation (NARUC 1994), Tables 59A and

B (state jurisdiction with respect to the issue and sale of

securities by public-utilities).

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In proposing the amendment to rule 52, the Commission contemplated

that the effective cost of capital for debt securities which have

recently been issued by the purchasing associate company will be the

coupon rate of interest plus all expenses, including, but not limited

to, underwriters' compensation, discounts, and fees and commissions

associated with the issue and sale of such debt; and that, in the event

the purchasing associate company has not recently issued debt

securities, the effective cost of capital may be tied to an appropriate

index such as, but not limited to, the Federal Funds' rate or a

published bond index. The Commission invited comment on whether other

factors should be considered in determining the effective cost of

capital of the purchasing associate company.

APS suggests that filing fees, listing fees, counsel and

accountants' fees, Blue Sky survey fees, and transfer agent fees should

also be considered.12 The Commission agrees that all ordinary and

necessary costs of a debt offering should be considered.

\12\ APS at 1.

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CNG recommends that the Commission permit use of an appropriate

index to determine the effective cost of capital if the associate

company has issued debt securities in circumstances where the financing

terms are not comparable to the terms of the intrasystem loan.13

We believe that the language of the final rule is flexible enough to

permit use of a published rate or index in these circumstances.

\13\ CNG at 2.

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2. Issue and Sale of Securities by Nonutility Subsidiaries

In the Proposing Release, the Commission noted the large volume of

debt securities sold by nonutility subsidiaries of registered holding

companies. The Commission proposed [[Page 33636]] to amend rule 52 to

encompass nonutility as well as utility subsidiaries. So doing, the

Commission noted that absent further amendment of the rule, routine gas

intrasystem financings would remain subject to the requirement of prior

approval.14

\14\ The Commission noted that the nonutility operations of

registered gas holding companies rival in size the utility

operations, largely because the Act does not include transmission

assets in the definition of a gas utility company.

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Section 6(b) provides that the Commission shall exempt the issue

and sale of a security of a nonutility subsidiary of a registered

holding company for the purpose of financing the subsidiary's business,

subject to such terms and conditions as the Commission deems

appropriate in the public interest or for the protection of investors

or consumers. In enacting section 6(b), Congress intended the

Commission ``to exempt the issue of securities by subsidiary companies

in cases where holding company abuses are unlikely to exist.15

\15\ H. R. Conf. Rep. No. 1903, 74th Cong., 1st Sess. 66-67

(1935).

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In the past, the Commission has granted exemptions for nonutility

financings by order on a case-by-case basis. The Commission, in 1989,

also considered an exemption by rule for such financings. In the

release proposing the original rule 52, the Commission deferred action,

citing its concern ``with the adverse consequences that potential

growth of debt in the nonutility subsidiary companies could have for

the holding-company system and the public utility subsidiaries.''

16

\16\ Holding Co. Act Release No. 24891 (May 17, 1989), 54 FR

22314 (May 23, 1989) (proposing rule 52).

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Our experience since that time suggests to the Commission that a

case-by-case approach to nonutility financings is no longer necessary.

In addition, the extensive reporting requirements imposed on registered

holding company systems by the Act and other federal securities laws,

and the level of scrutiny of reporting companies by investors and by

the financial community suggest that the rule may appropriately

encompass nonutility as well as utility subsidiaries. All of the

registered holding companies submitting comments support expansion of

the rule to exempt routine nonutility subsidiary financings.

GPU, noting the widespread use of partnership interests and other

types of securities in nonutility financing, particularly in the

context of project finance, recommends the inclusion of such securities

in rule 52(b).17 Because the Commission is proposing a further

amendment to rule 52 to extend the exemption of the rule to all types

of securities issued by subsidiary companies of a registered holding

company, so long as the other conditions of the rule are met, we do not

think it necessary to address the status of partnership interests

separately at this time.18

\17\ GPU at 3.

\18\ Filings with the Commission to date suggest that the kinds

and types of securities issued by nonutility subsidiaries, such as

independent power subsidiaries, will vary more than those issued by

public utility subsidiaries.

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In the Proposing Release, the Commission invited comment on

whether, to avoid excess leveraging, the availability of the exemption

for security issuances of nonutility subsidiaries should be conditioned

upon a requirement that an issuance not cause the consolidated debt/

equity ratio of the holding company system to exceed 65/30.19 None

of the commenting holding companies support such a measure. Most

observe that market forces affecting the parent holding company's

common stock, as well as the desire to maintain credit quality ratings

on public utility debt, will effectively deter management from over-

leveraging the holding company capital structure.20

\19\ The Commission noted that this condition is drawn from

section 7(d)(1), which requires the Commission, in reviewing an

issuance of securities, to consider whether the security is

reasonably adapted to the security structure of the company issuing

the security and the other companies in the registered holding

company system. Under that section, the Commission generally has

required a registered holding company system and its public utility

subsidiaries to maintain a 65/30 debt/common equity ratio, the

balance generally being preferred equity. Such a debt/equity

capitalization requirement was included in rule 52, as originally

adopted, as applied to securities issued by public utility

subsidiaries, but was eliminated in 1992.

\20\ The Commission also notes the emphasis placed upon these

considerations in many comments received in response to our request

for comment concerning the modernization of regulation under the

Act. See Holding Co. Act Release No. 26153 (Nov. 2, 1994), 59 FR

55573 (Nov. 8, 1994).

GPU notes that financing of independent power project subsidiaries

is typically non-recourse to other companies in the holding company

system, so that including such debt in a consolidated capitalization

ratio would overstate the exposure of the registered system. GPU also

states that the use of a consolidated debt/equity ratio would not be

consistent with the Commission's approval of higher debt ratios in

numerous project financing applications.21 New Orleans, however,

supported by NARUC, believes that such a consolidated capitalization

ratio is necessary if proposed rule 52(b) is adopted, which, as

previously indicated, these commenters oppose.

\21\ GPU at 3-4.

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Total investment by registered holding companies in nonutility

subsidiaries, to date, has not been significant in amount. As of

December 31, 1994, the registered holding companies had invested only

$1.1 billion (1.4% of over $80 billion of total capitalization) in all

energy-related businesses, exclusive of exempt wholesale generators,

foreign utility companies and gas holding company transportation and

supply operations.

The Commission has concluded that it is unnecessary to condition an

exemption under rule 52(b) upon the maintenance of a consolidated debt/

equity ratio of 65/30.22 We agree with the arguments of the

holding companies in this respect. We also note that the Commission

will continue to have jurisdiction over securities sales by registered

holding companies. The Commission will thus be able to monitor, on a

continuing basis, the effects of holding company financing on the

consolidated capital structure of the registered system.

\22\ As in the case of a debt instrument issued by a public

utility subsidiary pursuant to the rule, the interest rates and

maturity dates of any debt security issued by a nonutility

subsidiary to an associate company would be required to parallel the

effective cost of capital of the associate company. See the

discussion supra, at 6-7, 8-9.

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Because rule 52(c) currently exempts only acquisitions of

securities issued and sold by a public utility subsidiary, the

Commission proposed to amend rule 52 to extend the exemption to

acquisitions of securities of nonutility subsidiaries as well. The

Commission is adopting the proposed amendment. Paragraph (c) of the

rule, with this change, becomes paragraph (d).

In a separate release, the Commission is today seeking comment on a

rule that would allow registered holding companies to diversify through

new or existing subsidiaries into certain categories of ``energy-

related'' businesses, subject to financial and other limitations. In

this connection, the Commission intends to revisit rule 52(d) to

conform or limit its scope.

3. Capital Contributions and Open Account Advances, Without Interest,

to Subsidiary Companies

Rule 52, as amended, does not provide an exemption for certain

other common intrasystem financing transactions. For example, a capital

contribution from a registered holding company to any of its subsidiary

companies is regulated as an intercompany loan under section 12(b)

[[Page 33637]] and rule 45.23 Open account advances that do not

bear interest are also subject to these provisions.

\23\ Section 12(b) and rule 45(a) generally require prior

Commission approval for a registered holding company or its

subsidiary company to ``lend or in any manner extend its credit to

or indemnify any company in the same holding-company system.''

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To facilitate these transactions, the Commission proposed to amend

rule 45(b)(4), which exempts up to $50,000 in capital contributions and

open account advances, without interest, made to any subsidiary during

a calendar year, to remove the dollar limitation of the rule.24

All of the registered holding companies submitting comments support

this change. New Orleans proposes that, if rule 45(b)(4) is amended, it

should exempt capital contributions or open account advances subject to

an aggregate limitation of $1,000,000 per year.

\24\ Rule 45(b)(4) exempts ``[c]apital contributions or open

account advances, without interest, to any subsidiary: Provided,

That after giving effect to the transaction the total net amount

which such subsidiary will have received during the calendar year as

a result of such transactions will not exceed $50,000 (after

deducting payments during the year regardless of the date of the

advances).'' The rule contained the $50,000 limitation when adopted

in 1941. Holding Co. Act Release No. 2694 (Apr. 21, 1941).

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As the Commission noted in the Proposing Release, the legislative

history of the Act makes clear that the Congress, while concerned with

holding company abuses, recognized that ``[d]own-stream loans * * * may

be legitimate sources of credit * * *,'' and concluded that ``the

subject is one in which the rule-making power of the Commission is

required to meet a host of varying circumstances.'' 25 Capital

contributions and open account advances, without interest, are routine

transactions which serve to transfer funds from the parent to its

subsidiary. The amounts and types of securities issued by any

registered holding company, which remain subject to prior approval by

the Commission, must be justified by reference to the need for capital

infusions by its subsidiaries, both utility and nonutility. Financing

requests must be supported by capital budget projections covering the

authorization period. The Commission believes that its ability to

supervise intrasystem financing through these means will not be

compromised by removal of the dollar limitation in rule 45(b)(4).

Accordingly, the Commission declines to incorporate an aggregate dollar

limitation in the rule as adopted.26

\25\ S. Rep. No. 621, 74th Cong., 1st Sess. 34-5 (1935).

\26\ We also intend to revisit rule 45(b)(4) in the context of

any rulemaking on nonutility diversification.

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4. Issuance of Other Securities

Finally, the Commission sought comment on whether the amendments to

rules 45 and 52 should be extended to exempt financing transactions

involving other securities, in particular, guaranties of debt

securities issued by other subsidiary companies.27 Because

guaranties are securities under the Act,28 their issuance and sale

are subject to the declaration requirement of section 6, unless

exempted under section 6(b). At present, rule 52 does not extend to the

issuance and sale of guaranties.

\27\ Section 12(a) prohibits the guaranty by subsidiary

companies of debt issued by a registered holding company.

\28\ See section 2(a)(16) (definition of security).

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In addition, the guaranty by a subsidiary company of debt

securities issued by another subsidiary company is subject to section

12(b) and rule 45 thereunder. Rule 45, with exceptions not relevant

here, prohibits the issuance of guaranties by a subsidiary company

without the filing of a declaration.29

\29\ At present, rule 45(b)(6) exempts certain guaranties ``in

the ordinary course of business.'' The rule by its terms does not

apply to a guaranty of a subsidiary's indebtedness for borrowed

money.

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As previously indicated, we are publishing a companion release

inviting comment on a further amendment to rule 52 to exempt the

issuance of all types of securities. Accordingly, there is no need to

address guaranties separately at this time.

5. Comments by the City of New Orleans and NARUC

New Orleans opposes any expansion of the exemptions from the

Commission's pre-approval requirement for financings provided by rules

45(b)(4) and 52 which, the city contends, would ``widen the existing

regulatory gap between federal and state and local regulators.''

30 New Orleans urges that, if the amendments are adopted, several

additional conditions need to be incorporated. Certain of these

additional conditions, or limitations on the availability of the

exemptions, have been discussed above. New Orleans states that these

conditions are generally necessary to protect public utility

subsidiaries of registered holding companies and their customers from

the financial effects of financing transactions, particularly in the

context of nonutility ventures that are not otherwise subject to

effective state oversight.

\30\ New Orleans, Executive Summary, at 4-5.

During the notice period inviting comment on the proposed

amendments to rules 45(b)(4) and 52, Congress passed the Energy Policy

Act of 1992.31 Title VII of the Energy Policy Act amended the Act

to permit investments by registered holding companies in ``exempt

wholesale generators'' (``EWGs'') and ``foreign utility companies''

(``FUCOs''), defined in new sections 32 and 33, respectively.32

Those sections exempt EWGs and FUCOs from all provisions of the Act,

including sections 6(a), 7 and 12(b), which would otherwise apply to

securities and guaranties issued and sold by such entities. However,

these sections do not exempt issuance and sale of securities by a

registered holding company in cases where the proceeds will be used for

EWG or FUCO investments, and these financing transactions continue to

require Commission approval under sections 6(a) and 7. Under section

32, Congress directed the Commission to promulgate rules with respect

to actions which would be considered to ``have a substantial adverse

impact on the financial integrity of the registered holding company

system'' to ensure that actions (e.g., financings, guaranties, etc.) by

any registered holding company in respect of EWGs would not have any

adverse impact on any utility subsidiary or its customers or on

effective state regulation.33 Similarly, under section 33,

Congress directed the Commission to promulgate rules regarding

registered holding companies' acquisitions of interests in FUCOs which

shall provide for the protection of the customers of associate public

utility companies and the financial integrity of the holding company

system.34

\31\ P.L. 102-486, 106 Stat. 2776 (1992).

\32\ An EWG is defined in section 32(a) of the Holding Company

Act as any person determined by the Federal Energy Regulatory

Commission to be engaged exclusively in the business of owning and/

or operating all or part of one or more facilities that are used for

the generation of electric energy, exclusively for sale at wholesale

or leased to a utility, and selling electric energy at wholesale. A

FUCO is defined in section 33(a) as any person that owns or operates

facilities outside the United States used for the generation,

transmission or distribution of electric energy for sale or for the

distribution at retail of natural or manufactured gas, that derives

no part of its income from such utility activities in the United

States and is not a public utility company operating in the United

States, and that provides notice to the Commission.

\33\ See section 32(h)(6).

\34\ See section 33(c)(1).

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The Commission had not yet initiated the rulemaking effort under

new sections 32 and 33 when it proposed the additional amendments to

rules 45(b)(4) and 52. In part for that reason, NARUC and New Orleans

both urged the Commission to delay any action on the proposed rules

pending development of consumer protection measures in the broader

context of investments in EWGs and FUCOs, which, for purposes of the

[[Page 33638]] Act, are nonutilities. However, since that time, several

related rules have been promulgated under the new provisions, and

others are pending.35 Those rules were intended to carry out the

Congressional mandates under sections 32 and 33.36 We note that

those rules are subject to a pending challenge by NARUC and

others.37

\35\ See Holding Co. Act Release No. 25886 (Sept. 23, 1993), 58

FR 51488 (Oct. 1, 1993).

\36\ Rule 53 provides standards for the Commission to determine

whether to approve the issue or sale of a security by a registered

holding company, in cases where the proceeds of the financing will

be used to acquire an EWG. Rule 54 provides that the effect of EWG

and FUCO operations on the registered system will not be considered

in determining whether to approve any other transactions under the

Holding Company Act, if the standards of rule 53 are satisfied. 17

CFR 250.53 and 250.54.

\37\ National Association of Regulatory Utility Commissioners,

et al. v. Securities and Exchange Commission, U.S. Court of Appeals

for the District of Columbia Circuit, No. 93-1778.

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The City of New Orleans recommends that the Commission consider the

proposed amendments in light of the Congressional mandates under

sections 32 and 33. We do not believe this measure is necessary. As

indicated, those provisions exempt EWGs and FUCOs from all provisions

of the Act, and the rules adopted under those sections are intended to

provide a means to ensure that investments by the holding company and

activities of the exempt subsidiaries have not adversely affected the

holding company or its utility customers. The proposed amendments to

rules 45(b)(4) and 52, in contrast, exempt only public utility

financing that has been reviewed and approved by state commissions, and

financing by nonutility subsidiaries (other than EWGs and FUCOs) that

is non-recourse to the holding company or any utility subsidiary. As a

result, the activities exempted by the proposed rule amendments are not

nearly so far-reaching as the EWG and FUCO provisions, and do not have

the same need for additional consumer protection. Further, and this

distinction appears critical, the acquisition by a registered holding

company of an interest in a new nonutility business, and any other

actions related thereto, such as the organization of a separate

subsidiary to conduct that business, the initial capitalization

thereof, intrasystem guaranties and any arrangements for the sale of

goods and services to the new subsidiary, are, in the absence of any

other applicable exemption, subject to the pre-approval process

required under applicable provisions of the Act, as well as to ongoing

reporting requirements and other requirements of the Act regarding

maintenance of books and records, audits, inspections and the like.

State commissions, consumer groups and other interested parties have

the opportunity to express their views regarding the likely effects of

nonutility ventures on consumers and other protected interests and to

propose safeguards appropriate in order to protect these interests in

connection with this pre-approval process.38

\38\ Further, the amended rules do not create any new exemption

from the pre-approval process for guaranties by a registered holding

company of the securities or other obligations of any subsidiary.

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In addition to the modifications to the proposed rules mentioned

elsewhere in this release, New Orleans recommends that the rules, if

adopted, should require prior approval of a holding company's cost of

capital by each state and local commission which regulates the parent.

The Commission understands this request to involve approval by a

commission in each of the states in which the holding company's public

utility subsidiaries operate.39 Because the rules do not exempt

holding company financings from our approval, we see no useful purpose

to be achieved by requiring a multistate determination of a holding

company's cost of capital. The Commission is specifically obligated by

section 7(d) to consider the reasonableness of the fees, commissions

and other expenses of a securities issuance which would be relevant to

the determination of a holding company's effective cost of capital in

connection with our consideration of any holding company financing

applications.

\39\ New Orleans at 15.

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New Orleans' suggestion that rule 52, as proposed to be amended,

also be conditioned upon a requirement for state commission approval in

every state in a holding company's service territory for any guaranty

is likewise misplaced.40 As previously stated, the rules do not

exempt registered holding companies from the requirement to obtain

Commission approval in connection with issuing any guaranty.

\40\ New Orleans at 16.

In summary, we do not believe that the proposed amendments to rules

45(b)(4) and 52 will compromise our ability to protect consumers and

investors, and we do not find that the additional conditions and

restrictions proposed by New Orleans are necessary for this purpose. We

are therefore adopting the proposed amendments to rules 45(b)(4) and 52

substantially in the form proposed.

Conclusion

The Commission believes that the registered holding-company systems

should have a greater ability to engage in routine financings without

the regulatory burden of prior Commission authorization, and that this

may be done without jeopardizing the interests the Act is designed to

protect. The rule amendments adopted today are consistent with those

two objectives.

Regulatory Flexibility Act Certification

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

proposed amended rules will not, if adopted, 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.

Costs and Benefits

Amended rule 52 will substantially decrease regulatory compliance

costs for the registered holding companies. In calendar years 1993 and

1994, 122 applications would not have been filed, had the proposed

amended rule 52 been in place. Estimated savings per application would

have been approximately $30,000 including the $2,000 filing fee per

application, and related legal, accounting, and management costs. Thus,

for 122 applications filed in calendar years 1993 and 1994, the

aggregate savings would have been approximately $3,660,000 or

$1,830,000, respectively, per year. Moreover, the reduction in

Commission staff hours associated with reviewing and analyzing these

applications would have been approximately 5,700 hours per year (2.5

staff years). The only cost to the registered holding companies in

complying with the amended rule will be the cost of completing a Form

U-6B-2 after the issue or sale of any security. It is estimated that

approximately one hour will be required to complete each form at an

estimated cost of $100 per hour. Assuming 61 financing applications per

year, the cost of compliance reporting would approximate $6,100 per

year.

Paperwork Reduction Act

The proposed amended rules are subject to the Paperwork Reduction

Act of 1980 (44 U.S.C. 79 et seq.) and have been submitted to the

Office of Management and Budget for approval to use them through July

31, 1997. Final action is expected by June 23, 1995.

Statutory Authority

The Commission is amending rules 45 and 52 pursuant to sections 6,

9, 12 and 20 of the Public Utility Holding Company Act of 1935.

[[Page 33639]]

List of Subjects in 17 CFR Part 250

Electric utilities, Holding companies, Natural gas, Reporting and

recordkeeping requirements, Securities.

Text of Final Rules

For the reasons set forth in the preamble, Part 250 of chapter II,

title 17, of the Code of Federal Regulations is amended 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. Section 250.45 is amended by revising paragraph (b)(4) to read

as follows:

Sec. 250.45 Loans, extensions of credit, donations and capital

contributions to associate companies.

* * * * *

(b) Exceptions. * * *

(4) Capital contributions or open account advances, without

interest, by a company to its subsidiary company.

* * * * *

3. Section 250.52 is revised to read as follows:

Sec. 250.52 Exemption of issue and sale of certain securities.

(a) Any registered holding-company subsidiary which is itself a

public utility company shall be exempt from section 6(a) of the Act (15

U.S.C. 79f(a)) and rules thereunder with respect to the issue and sale

of any common stock, preferred stock, bond, note or other form of

indebtedness, of which it is the issuer (excluding any guaranty and

other form of assumption of liability on the obligations of another)

if:

(1) The issue and sale of such security are solely for the purpose

of financing the business of such public utility subsidiary company;

(2) The issue and sale of such security have been expressly

authorized by the state commission of the state in which such

subsidiary company is organized and doing business; and

(3) The interest rates and maturity dates of any debt security

issued to an associate company are designed to parallel the effective

cost of capital of that associate company.

(b) Any subsidiary of a registered holding company which is not a

holding company, a public utility company, an investment company, or a

fiscal or financing agency of a holding company, a public utility

company or an investment company shall be exempt from section 6(a) of

the Act (15 U.S.C. 79f(a)) and rules thereunder with respect to the

issue and sale of any common stock, preferred stock, bond, note or

other form of indebtedness, of which it is the issuer (excluding any

guaranty and other form of assumption of liability on the obligations

of another) if:

(1) The issue and sale of such security are solely for the purpose

of financing the existing business of such subsidiary company; and

(2) The interest rates and maturity dates of any debt security

issued to an associate company are designed to parallel the effective

cost of capital of that associate company.

(c) Within ten days after the issue or sale of any security exempt

under this section, the issuer or seller shall file with the Commission

a Certificate of Notification on Form U-6B-2 (17 CFR 259.206)

containing the information prescribed by that form. However, with

respect to exempt financing transactions between associate companies

which involve the repetitive issue or sale of securities or are part of

an intrasystem financing program involving the issuance and sale of

securities not exempted by this section, the filing of information on

Form U-6B-2 may be done on a calendar quarterly basis.

(d) The acquisition by a company in a registered holding company

system of any security issued and sold by any associate company,

pursuant to this section, is exempt from the requirements of section

9(a) of the Act (15 U.S.C. 79i(a)); provided that the exemption granted

by this paragraph (d) shall not apply to any transaction involving the

issue and sale of securities to form a new subsidiary company of a

registered holding company.

Dated: June 20, 1995.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-15836 Filed 6-27-95; 8:45 am]

BILLING CODE 8010-01-P