Registered Public-Utility Holding Companies and Internationalization

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 250

[Release No. 35-27110; International Series Release No. 1210; File No.

S7-30-99]

Registered Public-Utility Holding Companies and

Internationalization

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comments.

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SUMMARY: We are seeking comment on various issues surrounding the

acquisition of United States utilities by foreign companies that will

register as holding companies following the transaction.

DATES: Comments must be submitted on or before February 4, 2000.

ADDRESSES: Please send three copies of the comment letter to Jonathan

G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth

Street, NW, Washington, DC 20549-0609. Comments also may be submitted

electronically at the following E-mail address: [email protected].

All

[[Page 71342]]

comment letters should refer to File No. S7-30-99; include this file

number on the subject line if E-mail is used. Anyone can read and copy

the comment letters at our Public Reference Room, 450 Fifth Street, NW

Washington, DC 20549. Electronically submitted comment letters also

will be posted on our Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Catherine A. Fisher, Assistant

Director, or Mark F. Vilardo, Senior Counsel, both at 202/942-0545.

SUPPLEMENTARY INFORMATION: Today we are requesting comment on issues

arising under the Act with respect to foreign acquisitions of U.S.

utilities.

Table of Contents

I. Executive Summary and Introduction

II. Background

III. Acquisition of U.S. Utilities by Foreign Companies

A. The Legal Framework

B. Areas for Comment

1. General Policies of the Act

2. Section 11

3. Other Standards for Reviewing Acquisitions

4. Substantive Regulation of Foreign Holding Companies

5. Accounts and Records; Jurisdiction

6. Other Issues

I. Executive Summary and Introduction

In 1992, Congress adopted the Energy Policy Act of 1992 [Pub. L.

102-486, 106 Stat. 2776 (1992)] (``Energy Policy Act''). The

legislation amended the Public Utility Holding Company Act of 1935 [15

U.S.C. 79(a) et seq.] (``Holding Company Act'' or ``Act'') to create

two new types of exempt entities, exempt wholesale generators

(``EWGs'') and foreign utility companies (``FUCOs''). The legislation

was intended to facilitate investments in foreign utilities by U.S.

companies.

Just as registered holding companies have pursued investment

opportunities abroad, foreign companies are increasingly seeking to

enter the utility business in the United States.1 Recently,

two British companies engaged in the utility or energy business,

Scottish Power plc (``ScottishPower'') and The National Grid Group plc

(``National Grid''), have announced (and, in the case of ScottishPower,

completed) plans to acquire U.S. utilities or public-utility holding

companies.2 ScottishPower has registered under the Act and

National Grid has announced its intention to do so. The acquisition of

a U.S. utility or holding company by a foreign company and the

acquiror's subsequent registration raise a number of interpretative and

policy issues under the Act. We will need to address these issues when

such transactions are presented to us for any necessary approvals or

when the foreign companies register under the Act. We are, therefore,

seeking comment from the public relating to these issues.

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\1\ See infra note 5.

\2\ On December 7, 1998, ScottishPower, an electric, gas and

water utility based in the United Kingdom, announced its proposed

acquisition of PacifiCorp, a electric utility operating in the

western United States, in a share exchange valued at $12.8 billion,

including assumed debt. See ScottishPower Offers $7.8 Billion for

PacifiCorp, Megawatt Daily, Dec. 8, 1998, at 1. On December 14,

1998, National Grid, an electric transmission utility, also based in

the U.K., announced its proposed acquisition of New England Electric

System (``NEES''), an electric utility operating in the northeast

United States, for $3.2 billion in cash. See Laura Johannes,

Electric Utility Set to Be Acquired by National Grid, Wall St. J.,

Dec. 14, 1998, at A2. In June 1999, the Federal Energy Regulatory

Commission (``FERC'') approved each of these transactions. See

Howard Buskirk, FERC Approves Foreign Buys of U.S. Utilities, The

Energy Daily, Jun. 17, 1999, at 3. On November 30, 1999,

ScottishPower announced that it had completed its acquisition of

PacifiCorp. On December 1, 1999, ScottishPower filed with this

Commission its Form U5A, notification of registration as a holding

company under the Act. National Grid's application concerning its

acquisition of NEES is pending at the Commission. See Holding Co.

Act Release Nos. 27085 and 27086 (Oct. 8, 1999), 64 FR 56236 (Oct.

18, 1999) and 64 FR 56372 (Oct. 19, 1999) (notices of the

applications relating to the proposed acquisition of NEES by

National Grid and National Grid's financing authorizations).

ScottishPower concluded that, under section 9(a) of the Act, it did

not require our approval to acquire PacifiCorp. See infra note 29

for a discussion of the circumstances under which a utility

acquisition requires our approval.

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II. Background

Congress amended the Holding Company Act in 1992 in response to

changes in the United States utility industry. As discussed in greater

detail below, the Energy Policy Act created new categories of exempt

entities and thereby provided greater flexibility for U.S. and foreign

companies to acquire EWGs and for U.S. utilities to acquire both EWGs

and FUCOs.3

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\3\ The Energy Policy Act amended the Holding Company Act by,

among other things, adding section 33, which addresses acquisition

and ownership of FUCOs. In section 33(c)(1), Congress directed the

Commission to adopt rules concerning FUCO acquisitions by registered

holding companies. See 15 U.S.C. 79z-5b(c)(1). Under this directive,

the Commission proposed rules 55 and 56 in 1993, but deferred action

on those rules in order to consider the comments received on the

rules. See Holding Company Act Release No. 25757 (Mar. 8, 1993), 58

FR 13719 (Mar. 15, 1993) (proposing release); Holding Company Act

Release No. 25886 (Sept. 23, 1993), 58 FR 51488 (Oct. 1, 1993)

(adopting certain rules, deferring action on rules 55 and 56). The

Commission will consider reproposing rules 55 and 56 in the near

future.

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The utility business is rapidly evolving into a global industry,

with participants seeking multinational investment opportunities.

Sweeping political and economic changes worldwide have created a large

demand for American utility expertise and significant investment

opportunities for United States companies. Registered public utility

holding companies have taken advantage of these opportunities. As of

December 31, 1998, registered holding companies had invested $8.2

billion in FUCOs and $892 million in domestic and foreign EWGs. Based

on publicly reported information, we believe that investments made by

exempt holding companies and public utilities not part of a registered

or exempt holding company system, are significantly higher.4

At the same time, foreign energy companies have made significant

investments in the United States, primarily through acquisition of

electric wholesale generation units which, by virtue of the Energy

Policy Act, are exempt from the Act.5 In this Release, we

are requesting comment on issues relating to the acquisition of U.S.

utility companies by foreign holding companies.

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\4\ As of December 31, 1998, holding companies exempt under rule

2 of the Act had invested $12.3 billion in FUCOs and domestic and

foreign EWGs. In addition, domestic energy companies that are not

part of either a registered or exempt holding company system have

made major investments in FUCOs and EWGs in recent years. For

example, in 1995 and 1996, PacifiCorp, a public utility company

operating in the western United States, acquired an Australian

electric distribution company and an interest in an Australian power

plant and mine for a total of $1.7 billion. According to a U.S.

Department of Energy report, U.S. energy companies have played ``a

major role * * * as investors in the reformed and privatized

electricity sectors'' in the United Kingdom, Australia and

Argentina. See Electricity Reform Abroad and U.S. Investment, Energy

Information Administration, September 1997, at v.

\5\ In 1998, foreign utilities invested $31.3 billion in the

United States. See Power Legislation; Foreign Companies Acquiring

U.S. Utility Systems: Overcoming PUHCA, Power Economics, March 31,

1999, at p. 23. For example, National Power plc, the U.K.'s largest

power generator, has invested over $1.0 billion in U.S. generating

facilities and had announced plans to spend an additional $1.6

billion on U.S. generation projects and acquisitions. See Overseas

Investments; National Power Steps Over the Pond, Power Economics,

Nov. 30, 1998, at 5. In addition, British Energy Inc., a British

utility, in partnership with PECO Energy Co., an inactive registered

holding company, have agreed to buy three of four U.S. nuclear

plants that have been put up for sale in the past year. See

Christopher Palmieri and John Gorham, Give Me Your Nukes, Forbes,

Sept. 6, 1999, at 124-25. See also infra note 37.

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III. Acquisition of U.S. Utilities by Foreign Companies

In 1994, in recognition of the increasingly international nature of

the energy business, we requested public comment on the concept of

foreign ownership of U.S. utilities.6 We asked,

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among other things, whether the Holding Company Act permits foreign

ownership; what conditions should be placed on foreign ownership;

whether there was a national security interest in restricting foreign

ownership of U.S. utilities; whether there are difficulties in

obtaining information from foreign companies that would support

limitations on foreign ownership; and what types of safeguards or

limitations on ownership might prevent or minimize such risks.

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\6\ See Request for Comments on Modernization of the Regulation

of Public-Utility Holding Companies, Holding Co. Act Rel. No. 26153

(Nov. 2, 1994), 59 FR 55573 (Nov. 8, 1994).

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Most commenters appeared to agree that the Holding Company Act did

not, or should not, prohibit foreign ownership of U.S.

utilities.7 Commenters suggested that foreign ownership

could bring some advantages to domestic utilities--increased sources of

capital (which could reduce the cost of capital) and management

experienced in dealing with competitive markets.8 Commenters

agreed that foreign holding companies would and should be subject to

the same regulatory requirements as U.S. companies.9 Local

regulators were divided on whether foreign ownership would impede their

ability to obtain information relevant to ratemaking.10

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\7\ Consolidated Natural Gas Company; NEES; Southern Company

(``Southern''); Wisconsin Electric Power Company; City of New

Orleans; American Gas Association (``AGA''); National Power PLC/

American National Power, Inc.; New York State Bar; Yorkshire

Electricity Group/National Grid Company (``Yorkshire''). Only two

commenters, the staff of the Michigan Public Service Commission

(``MPSC'') and Allegheny Power System (``APS''), suggested that

foreign ownership should be prohibited. Comments we received in

response to our initial request for comments may be found in File

No. S7-32-94.

\8\ City of New Orleans; Southern; Yorkshire.

\9\ See, e.g., AGA; City of New Orleans.

\10\ The MPSC expressed concern that absentee owners may not

place sufficient emphasis on service and the public interest, and

that access to books and records may be compromised. On the other

hand, City of New Orleans stated that foreign ownership would not

impair access to relevant books and records.

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Since our initial request for comment, there have been significant

foreign investments in domestic power projects.11 The

prospect of foreign ownership of significant U.S. utilities is raised

by ScottishPower's acquisition of PacifiCorp and National Grid's

proposed acquisition of NEES.12 ScottishPower has registered

under the Act, and National Grid has announced its intention to do so.

The acquisition of a U.S. utility or holding company by a foreign

company and the acquiror's subsequent registration raise a number of

interpretative and policy issues under the Act. We think it

appropriate, therefore, to renew our request for comment on the issues

related to foreign ownership of U.S. utilities.

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\11\ See supra notes 4 and 5.

\12\ See supra note 2.

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A. The Legal Framework

Federal law imposes various restrictions on foreign ownership of

some significant industries. Some laws specifically restrict foreign

ownership.13 Others provide for ownership subject to certain

conditions. The Federal Aviation Act, for example, establishes

percentage limitations on board membership and voting interests in

determining whether an air carrier is considered a United States

citizen.14

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\13\ See, e.g., 16 U.S.C. 797 (power production on land and

water controlled by the U.S. government); 42 U.S.C. 2131-2134

(prohibition of foreign ownership or control of facilities that

produce or use nuclear materials); 42 U.S.C. 6508 and 43 U.S.C. 1701

et seq. (oil and gas leases within the National Petroleum Reserve).

\14\ See 49 U.S.C. 1301(16) (air carrier considered U.S.citizen

if president and two-thirds of board of directors and other managing

officers are U.S. citizens and at least 75% of voting interest is

owned or controlled by U.S. citizens).

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In contrast, the Holding Company Act is silent concerning foreign

ownership of domestic utilities. Nowhere does the Act explicitly

require that a holding company be organized under U.S.

law.15 Indeed, we have noted that the Holding Company Act

``contains no prohibition against foreign holding companies as such.''

16 We have not had occasion, however, at least in recent

times, to address the registration under the Act of a foreign holding

company.

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\15\ The key definitions in the Holding Company Act (e.g.,

``electric utility company,'' ``gas utility company,'' ``public-

utility holding company,'' ``holding company,'' ``holding-company

system'') make no reference to a company's domicile. See, e.g.,

sections 2(a)(3) [15 U.S.C. 79b(a)(3)], 2(a)(4) [15 U.S.C.

79b(a)(4)], 2(a)(5) [15 U.S.C. 79b(a)(5)], 2(a)(7) [15 U.S.C.

79b(a)(7)] and 2(a)(9) [15 U.S.C. 79b(a)(9)] of the Act. Section 5

[15 U.S.C. 79e] of the Act, which sets forth certain procedural

requirements for registration under the Act, does not refer to the

domicile of the holding company.

Section 4(b) [15 U.S.C. 79d(b)] of the Act does make reference

to holding companies' being organized under state law. This section

generally requires that a holding company must register with the

Commission if any of its securities that were publicly offered after

January 1, 1925 are held ``by persons not resident in the State in

which such holding company is organized.'' (Section 2(a)(24) of the

Act defines the term ``State'' to mean ``any State of the United

States or the District of Columbia.'') The legislative history

suggests that section 4(b) was included to assure that the Act

subjected to federal regulation those companies that might in some

way affect interstate commerce, rather than to require that holding

companies be organized under state law. See S. Rep. No. 621, 74th

Cong., 1st Sess. 25:

[Section 4(b)] subjects to Federal jurisdiction those holding

companies which, though they may not contemplate new acts in

interstate commerce in the immediate future, are nevertheless

affected with a national public interest by reason of the fact that

they have in the past set in motion through the channels of

interstate commerce forces which affect investors throughout the

country, which forces are still in operation in more than one State

and cannot be effectively dealt with by any State.

\16\ Gaz Metropolitain, Inc., Holding Co. Act Rel. No. 26170

(Nov. 23, 1994) (``Gaz Met''). In Gaz Met we approved the

acquisition of a Vermont gas utility by a Canadian gas holding

company and granted the holding company an exemption from

registration under section 3(a)(5) of the Act. Section 3(a)(5) makes

an exemption available to a holding company that ``is not, and

derives no material part of its income, directly or indirectly, from

any one or more subsidiary companies which are, a company or

companies the principal business of which within the United States

is that of a public-utility company.''

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It appears that Congress, in 1935, did not intend or foresee

ownership of a domestic utility by a holding company domiciled outside

the United States. The Act places structural and geographic limitations

upon public-utility holding company systems. Section 11 of the Act

generally limits a registered holding company to ownership of a single

``integrated public-utility system,'' defined in terms of a group of

naturally related operating properties. Under section 2(a)(29) of the

Act, an integrated public-utility system is ``confined in its

operations to a single area or region, in one or more States * * *.''

17

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\17\ The provisions of section 11(b)(1)(A)-(C) create an

exception to the requirement of a single integrated system. Clause B

would permit a registered holding company to own, in addition to its

primary U.S. integrated system, an additional system located in a

contiguous foreign country.

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For many years, it was generally assumed that the integration

provisions of the Act would generally preclude a U.S. registered

holding company from owning both domestic and foreign utility

properties, especially if the foreign utility operations were located

in a country not contiguous to the United States.18 For

virtually identical reasons, the integration provisions were understood

to bar a holding company with foreign utility operations from acquiring

a U.S. utility.19

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\18\ See, e.g., Electric Bond and Share Co., 33 S.E.C. 21 (1952)

(``the provisions of Section 11(b)(1) stand in almost every detail

as an unyielding barrier'' to the simultaneous holding of large

domestic utility operations and utility operations in Cuba, Mexico,

Central and South America, China and India). See also Report

Relating to Intercorporate Relations Between the General Public

Utilities Corp. and the Manila Electric Company, S. Rep. 2787, 84th

Cong., 2d Sess. (July 25, 1956) (report of Senator Magnuson from the

Committee on Interstate and Foreign Commerce to accompany H.R.

10621, a bill to exempt General Public Utilities Corp., a registered

holding company, from the provisions of section 11(b)(1) of the Act,

under which we had ordered the holding company to divest its

Philippine utility subsidiary).

\19\ See Gaz Met, supra note 16. In Gaz Met, we determined that

the integration provisions did not bar the Canadian gas holding

company from owning a Vermont gas utility.

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In 1992, we determined that a U.S. registered holding company could

acquire foreign utility properties notwithstanding the integration

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provision.20 In that year also, as discussed previously,

Congress amended the Holding Company Act to permit the ownership of

EWGs and FUCOs--utility properties that would not, when combined with

existing utility properties, constitute an integrated system.

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\20\ See Southern Co., Holding Co. Act Release No. 25639 (Sept.

23, 1992) (authorizing registered holding company to acquire

Australian utility operations). We relied upon the second clause of

section 10(c)(2), which provides that section 10(c)(2), requiring us

to find that an acquisition ``will serve the public interest by

tending towards the economical and efficient development of an

integrated public-utility system,'' does not apply to an acquisition

of a public-utility company operating exclusively outside the United

States. In 1992, also, we granted orders of exemption under section

3(b) from all provisions of the Act for two newly formed indirect

Australia subsidiaries of SCEcorp, an exempt holding company. See

SCEcorp., Holding Co. Act Release No. 25564 (June 29, 1992).

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Sections 32 and 33 provide that EWGs and FUCOs are not public-

utility companies. Thus, the Act's statutory integration provisions, by

their terms, are not applicable to these entities. To eliminate any

doubt that ownership does not implicate the Act's integration

requirements, section 33(c)(3) provides that ownership of a FUCO is

considered to be ``consistent with the operation of a single integrated

public utility system, within the meaning of section 11 * * *.''

21 Section 32(h)(1) contains a similar provision for EWGs.

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\21\ Section 11 also provides that any nonutility business owned

by a registered holding company be ``reasonably incidental, or

economically necessary or appropriate, to the operations of such

integrated public utility system * * *.'' Section 33(c)(3) provides

that ownership of a FUCO satisfies this standard.

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Section 33 is neutral on its face with respect to the ownership of

a FUCO by a foreign holding company.22 It is thus possible

to construe section 33(c)(1) to allow a foreign holding company to

qualify its foreign utility operations as a FUCO, and the foreign

holding company to acquire a U.S. utility without regard to the

integration of the foreign and domestic operations. As explained above,

the Act would otherwise generally raise significant barriers to an

acquisition of U.S. utility properties by a foreign company with

existing foreign utility properties.

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\22\ Section 33(a)(1) provides an exemption for a FUCO

``notwithstanding that the [FUCO] may be a subsidiary * * * of a

holding company or of a public utility company.'' The nationality of

the holding company is not a component of the exemption. Similarly,

section 32 allows ownership of a domestic EWG without regard to the

owner's nationality.

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In adopting the Energy Policy Act, Congress did not address this

possibility and therefore may not have intended this interpretation of

section 33(c)(1). The legislative history of the Energy Policy Act

emphasizes that the legislation was designed to enable U.S. companies

to respond to domestic and overseas investment opportunities. Nothing

in the legislative history suggests that section 33 was intended to be

a vehicle for foreign investment in the United States.

Moreover, although section 33(c)(1) does not expressly preclude

foreign holding companies, we do not believe it should be interpreted

to permit a foreign holding company to acquire a U.S. utility if doing

so would undercut the fundamental purpose of the Act--to protect

consumers and investors.23 We recognize that foreign

registered holding companies present novel and important issues. We

therefore are soliciting comments generally on the registration and

regulation of foreign holding companies. These comments will inform our

consideration of rule 55, our consideration of applications and

requests for interpretative guidance concerning foreign holding

companies and our review, under section 11, of registration statements

filed by foreign holding companies. The comments may also suggest an

additional rulemaking to address these issues.

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\23\ See Crandon v. United States, 494 U.S. 152, 158 (1990)

(``In determining the meaning of [a federal] statute, [the court]

look[s] not only to the particular statutory language, but to the

design of the statute as a whole and to its object and policy.'')

(citations omitted).

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B. Areas for Comment

1. General Policies of the Act

The Holding Company Act was intended to address the practices by

which small groups of investors, by means of the holding company

structure, were able to exploit vast networks of utility companies, to

the detriment of utility consumers and other security holders. The

specific problems identified by Congress included inadequate

disclosure, excessive leverage, abusive affiliate transactions, evasion

of state regulation, and the growth and extension of holding companies

without regard to the economy of management and operation of system

utility companies.24

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\24\ Section 1(b) of the Holding Company Act [15 U.S.C. 79a(b)].

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We request comment whether foreign registered holding companies, by

virtue of being foreign, are inconsistent with the Holding Company

Act's policies. In general, we request comment concerning:

the effects of foreign ownership on effective Commission

regulation;

the effects of foreign ownership on effective state

regulation;

the effects of foreign ownership on investor protection;

and

the effects of foreign ownership on consumer protection.

In particular, a registered foreign holding company would likely

own significant foreign utility operations. The magnitude of these

foreign utility operations could be significantly greater than those

currently owned by U.S. holding companies; they could be significantly

larger than the holding company's U.S. utility system. Will this expose

U.S. ratepayers to greater risks? Should newly registered, foreign

holding companies' interests in FUCOs and EWGs be ``grandfathered,''

with only post-registration FUCO and EWG investments counted toward the

aggregate investment test of rule 53(a)(1)? 25 U.S. holding

companies, in seeking authorization to issue securities to finance the

acquisition of FUCOs, have represented that they will not seek recovery

in rates for any losses, or inadequate returns, on their investments in

FUCOs and EWGs. Will foreign holding companies be in a position to make

similar undertakings with respect to their FUCO operations?

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\25\ Rule 53 provides a partial ``safe harbor'' for EWG

financings by registered holding companies. Among other things, in

order to qualify for the safe harbor the amount of a registered

holding company's aggregate investments in EWGs and FUCOs cannot

exceed 50% of the system's consolidated retained earnings. See rule

53(a)(1) [17 CFR 250.53(a)(1)].

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We also request comments on whether structural safeguards can be

developed to limit the risk that financial problems in the holding

company's FUCOs will have an adverse effect on U.S. ratepayers and

security holders of the holding company's U.S. subsidiaries. For

example, would requiring the U.S. utility subsidiary stock to be owned

by an intermediate holding company based in the U.S. and organized

under state law provide any additional protection to U.S. interests?

Would such intermediate holding companies be consistent with the Act's

goal of simplifying the corporate structure of holding companies? We

are particularly interested in the views of state regulators and

consumers concerning the effects of foreign ownership on state

regulation and consumer protection.

2. Section 11

Section 11 has been described by the Supreme Court as the ``very

heart'' of the Act.26 In addition to the general requirement

that a registered holding company own a single integrated public-

utility system, section 11 limits nonutility businesses to those that

are

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``reasonably incidental, or economically necessary or appropriate'' to

system utility operations, on our finding that the nonutility

businesses are ``necessary or appropriate in the public interest or for

the protection of investors or consumers and not detrimental to the

proper functioning of such system or systems.'' Section 11 further

directs us to require the simplification of the corporate structure of

registered systems and to ensure that voting power is fairly and

equitably distributed among security holders.

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\26\ SEC v. New England Elec. System, 384 U.S. 176, 180 (1966),

citing North American Co. v. SEC, 327 U.S. 686, 704 n.14 (1946).

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The policies underlying section 11 must also enter into our

consideration of the acquisition of a U.S. utility by a foreign

company. Section 10(c)(1) provides that we cannot approve an

acquisition if it would be detrimental to the carrying out of the

provisions of section 11. Section 10(c)(2) provides that we must find

that the acquisition will serve the public interest by tending towards

the economical and efficient development of an integrated public-

utility system.

Section 10(c)(2) ``make[s] clear that the Commission was not to

approve acquisitions of utility securities merely because of the

absence of indications of any positive detriment to the carrying out of

Section 11.'' 27 What types of direct or indirect benefits

should be considered under section 10(c)(2) when a foreign company

seeks to acquire a domestic utility? For example, would a domestic

public-utility system benefit from an affiliation with a financially

stronger foreign holding company, or a foreign company that has

experience in operating in competitive markets? Are these benefits a

sufficient basis for making the findings required by section 10(c)(2)?

Are there other economies and efficiencies that foreign ownership would

confer upon a domestic system?

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\27\ Electric Bond and Share Co., supra note 18, at 31.

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Commenters should specifically address the key goals of an

integrated system as reflected in section 2(a)(29)--the ``advantages of

localized management, efficient operation, and the effectiveness of

regulation * * *.'' 28 Localized management is a particular

issue in this context. The advantage of localized management is that

policies affecting consumers and local regulators are handled by

persons who are intimately familiar with local conditions and are

sensitive and responsive to the interests of the community and of

consumers. This does not necessarily mean that the directors and

officers of the holding company must be permanent residents of the

locality. For example, the advantages of localized management can be

realized where the authority and responsibility for local policy-making

are properly delegated throughout the service territory of the holding

company. Would a foreign holding company be able to preserve the

advantages of local management?

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\28\ Section 2(a)(29) of the Act.

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Section 11 not only addresses the integration of utility properties

but also requires us to limit the nonutility businesses of a registered

holding company to those that are ``reasonably incidental, or

economically necessary or appropriate to the operations of'' the

holding company system. We have interpreted this provision to reflect a

Congressional policy against nonutility acquisitions that bear no

functional relationship to the core utility business of the registered

holding company. We request comments on how this provision should apply

with respect to non-utility businesses of a FUCO.

3. Other Standards for Reviewing Acquisitions

Section 9 of the Act provides that, under certain circumstances,

the acquisition of a public-utility company or public-utility holding

company requires our prior approval.29 The main purpose of

section 9 is to prevent ``the growth and extension of holding companies

[that bear] no relation to economy of management and operation or the

integration and coordination of related operating properties'' (an

abuse that led to enactment of the Holding Company Act).30

Section 10 of the Act sets forth the standards for reviewing

acquisitions. Section 10(b) provides that we shall approve an

acquisition unless we affirmatively find that the acquisition will have

certain adverse consequences.31 Section 10(c)(2) provides

that we shall not approve an acquisition unless we affirmatively find

that the acquisition will ``[tend] towards the economical and the

efficient development of an integrated public-utility system.''

Finally, section 10(f) requires us to be satisfied that there is

compliance with state law.

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\29\ Section 9(a)(1) of the Act requires our prior approval

under section 10 of a direct or indirect acquisition by a registered

holding company of any securities or utility assets.

Section 9(a)(2) of the Act bars any person who is an affiliate

of a public-utility or holding company from becoming an affiliate of

any other public-utility company or holding company without our

prior approval. Section 2(a)(11)(A) defines an ``affiliate'' of a

specified company as ``any person that directly or indirectly owns,

controls, or holds with power to vote 5 per centum or more of the

outstanding voting securities of such specified company.'' As noted

above, a FUCO is not a public-utility company for purposes of the

Act.

An entity that has no public utility affiliate may acquire the

securities of a single utility without the need to seek or obtain

our prior authorization. This acquisition, which is known as a

``first bite,'' would not be subject to section 9(a)(2). For

example, ScottishPower concluded that its acquisition of PacifiCorp

constituted its ``first bite'' for purposes of section 9(a). See

PacifiCorp proxy statement, dated May 6, 1999, at 69.

An acquisition of a company having two or more utility

subsidiaries, however, would simultaneously involve both a ``first

bite'' and a ``second bite'' and so be subject to section 9(a)(2).

See Coral Petroleum, Inc., Holding Co. Act Release No. 21632 (June

19, 1980).

\30\ See section 1(b)(4) of the Act.

\31\ In addition to the findings discussed below, we must find

that the consideration paid in connection with the acquisition is

not reasonable or does not bear a fair relation to the sums invested

in or the earning capacity of the utility assets to be acquired or

the utility assets underlying the securities to be acquired.

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We request comments concerning whether the foreign nature of an

acquiror raises any particular issues concerning the application of

section 10. In addition to the issues relating to section 10(c), we

must consider the following issues:

Section 10(b)(1) Will the acquisition tend towards interlocking

relations or the concentration of control of public-utility companies,

of a kind or to an extent detrimental to the public interest or the

interest of investors, or consumers?

Traditionally, our evaluation of this factor has been informed by

federal antitrust policies.32 Should we weigh concentration

of control issues in view of the increasing internationalization of the

energy business? Should we continue to rely, where appropriate, upon

the findings and requirements of other agencies that address the

potential anticompetitive effects of an acquisition?

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\32\ See, e.g., Sempra Energy, Holding Co. Act Release No. 26890

(June 26, 1998) (relying upon findings and remedial measures of the

Department of Justice, the FERC and the interested state commission

to address potential anticompetitive effects of acquisition);

Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993)

(relying upon hearing records and orders of FERC and state

commissions). See also Madison Gas and Electric Co. v. SEC, slip

op., Dkt. No. 98-1216 (DC Cir. Mar. 16, 1999) (``We have previously

observed that the SEC is entitled to `watchfully' defer to the

determinations of other regulatory bodies * * *.'') (citations

omitted).

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Section 10(b)(3): Will the acquisition unduly complicate the

capital structure of the holding-company system of the applicant or be

detrimental to the public interest or the interest of investors or

consumers or the proper functioning of such holding-company system?

We request comments concerning how foreign ownership could ``unduly

complicate the capital structure of the holding company system * * *.''

We would, of course, have to consider whether the holding company has

[[Page 71346]]

issued stock with special voting rights to any particular group or

class.33 In this regard, we understand that, in connection

with certain foreign utility privatization transactions, foreign

governments hold special or ``golden'' shares that give them veto

rights with respect to certain corporate transactions. We recognize

that these shares are intended to protect the foreign government's

regulatory interests rather than to create the type of abusive capital

structure that led to passage of the Act. Are these types of

arrangements inconsistent with the Act?

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\33\ See section 11(b)(2).

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We would also consider whether foreign law imposed any impediments

on our ability to inspect the foreign holding company and its

subsidiaries. Such impediments could be detrimental to the public

interest, the interests of investors and consumers, and ``the proper

functioning of [a] holding-company system.''

4. Substantive Regulation of Foreign Holding Companies

The Holding Company Act imposes a comprehensive federal framework

of regulation on registered holding companies. A registered foreign

holding company would be subject to this framework to the same degree

as a registered domestic company. For example, we must approve:

issuances and sales of securities; 34

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\34\ Sections 6 and 7 require our prior approval under specified

qualitative standards for most types of securities issuances.

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certain acquisitions; 35 and

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\35\ Section 11(b)(1) confines the nonutility businesses of a

registered holding company to those that have a functional

relationship to its core utility business. Rule 58 under the Act

permits a registered holding company to acquire certain types of

non-utility businesses without our approval.

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sales of utility assets.

We also have jurisdiction over intrasystem transactions. For example,

section 12 requires our prior approval for a registered holding company

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

indemnify any company in the same holding-company system.'' Section 13

authorizes us to regulate service, sales and construction contracts

between operating utilities within a registered system and other

companies within the same system and require that such services be

performed at cost. Finally, registered holding companies are subject to

extensive reporting, recordkeeping and accounting requirements.

Despite our jurisdiction over registered holding companies, the

EWGs and FUCOs owned by a foreign registered holding company, like

those of a domestic registered holding company, would generally be

exempt from the Act. Moreover, a FUCO may issue and acquire securities

without our authorization. A registered holding company with large FUCO

operations may be able to issue securities through a FUCO to finance

other businesses. Does this raise significant policy issues under the

Act, even if the holding company's U.S. utilities do not have any

liability with respect to those financings?

5. Accounts and Records; Jurisdiction

The Holding Company Act contains a number of provisions designed to

prevent companies in registered holding company systems from engaging

in abusive affiliate transactions. In order for these provisions to be

effective, we were given the authority to monitor intra-system

transactions by requiring the making and keeping of holding company

system records and mandating that we have access to those

records.36

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\36\ See section 15 of the Act.

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We anticipate that we would be able to exercise this authority with

respect to foreign registered holding companies. We request any

information concerning possible impediments to our exercise of our

inspection authority and jurisdiction. Are there difficulties in

obtaining information from foreign companies that are inconsistent with

regulation under the Holding Company Act? What types of safeguards or

limitations on ownership might prevent or minimize such risks?

6. Other Issues

Are there any other policy issues related to foreign acquisitions

of U.S. utilities that we should consider? For example, do we need to

consider national security interests that would be implicated by a

foreign acquisition of a U.S. utility? 37 We note that the

President may investigate the national security effects of ``foreign

control of persons engaged in interstate commerce in the United

States,'' and suspend or prohibit any acquisition, merger, or takeover

of such persons in order to protect the national security.38

United States companies have acquired significant interests in FUCOs

over the past several years. Would restrictions on foreign ownership of

U.S. utilities be likely to lead to restrictions on investment in FUCOs

by U.S. investors?

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\37\ In response to our prior request for comments, APS raised

national security concerns. Most of the other commenters did not

believe that there were any national security concerns or that any

such concerns should be addressed by Congress. Some federal laws

specifically restrict foreign ownership of certain regulated

entities, while others provide for ownership subject to certain

conditions. See, e.g., 42 U.S.C. 2131-2134 (prohibition of foreign

ownership or control of facilities that produce or use nuclear

materials). The Nuclear Regulatory Commission (``NRC'') has

developed a ``Standard Review Plan'' for use in reviewing nuclear

power plant licenses involving foreign interests. See Final Standard

Review Plan on Foreign Ownership, Control, or Domination, 64 FR 5355

(Sept. 28, 1999). The NRC has approved, with certain restrictions on

foreign ownership and control, transfers of the operating license

for three nuclear power plants. See NRC Approves AmerGen's Takeover

of Clinton Plant, The Energy Daily, Nov. 30, 1999 (describing

transfers of two operating licenses to AmerGen Energy Co., a company

jointly owned by PECO Energy Co., an inactive registered holding

company, and British Energy Inc., a British utility company), and

PacifiCorp (Trojan Nuclear Plant), 64 FR 63060 (Nov. 18, 1999) (NRC

order approving transfer of licenses to ScottishPower). See also

supra note 5.

\38\ 50 U.S.C. App. 2170. The President has established the

Committee on Foreign Investment in the United States to administer

this authority. See 31 CFR 800.101, et seq.

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Dated: December 14, 1999.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-32952 Filed 12-20-99; 8:45 am]

BILLING CODE 8010-01-P