Federal Renewable Reserve Depository (FRRD), Federal Taxes, PCD’s and EPA
Foreign Power Plant Corporation Ownership
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.
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:
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?
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 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?
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
certain acquisitions;35 and
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
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?
December 14, 1999
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.
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.
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.
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).
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.
11 See supra notes 4 and 5.
12 See supra note 2.
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).
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."
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.
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.
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).
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.
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.
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).
24 Section 1(b) of the Holding Company Act [15 U.S.C. 79a(b)].
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)].
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).
27 Electric Bond and Share Co., supra note 18, at 31.
28 Section 2(a)(29) of the Act.
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.
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 (D.C. 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).
33 See section 11(b)(2).
34 Sections 6 and 7 require our prior approval under specified qualitative standards for most types of securities issuances.
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.
36 See section 15 of the Act.
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.
Federal Renewable Reserve Depository (FRRD), Federal Taxes, PCD’s and EPA
Foreign Power Plant Corporation Ownership