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Report to the Ranking Minority Member, Committee on Energy and 
Commerce, and the Honorable Edward J. Markey, House of Representatives:

July 2005:

Public Utility Holding Company Act:

Opportunities Exist to Strengthen SEC's Administration of the Act:

GAO-05-617:

GAO Highlights:

Highlights of GAO-05-617, a report to the Ranking Minority Member, 
Committee on Energy and Commerce, and the Honorable Edward J. Markey, 
House of Representatives.

Why GAO Did This Study:

The Public Utility Holding Company Act of 1935 (PUHCA), which is 
administered by the Securities and Exchange Commission (SEC), subjects 
public utility holding companies to federal regulation. Some recent 
events have raised concerns about SEC’s administration of the act. GAO 
was asked to review SEC’s administration of PUCHA. GAO’s objectives 
included determining the nature and the extent to which SEC regulates 
registered holding companies and the results of its regulation, the 
extent to which SEC reviews claims of exemption and the results of 
these reviews, and how SEC determines whether companies have a 
controlling influence over public utilities or holding companies.

What GAO Found:

SEC regulates registered holding companies primarily by reviewing their 
applications for transactions and conducting periodic examinations that 
focus on improperly allocated costs and weak internal controls. As a 
result of these examinations, SEC has identified deficiencies at 20 
companies since fiscal year 1999, which the agency estimates have 
resulted in consumer savings of over $450 million. However, holding 
companies identified some PUHCA forms and regulations that are 
outdated, which SEC staff plans to address as time and resources become 
available. Some parties have also observed that SEC’s interpretations 
of parts of the act have allowed holding companies to have complex 
corporate structures and exposed them to financial risks, but SEC has 
said that it interprets the act to respond to the demands of a changing 
industry. In addition, several holding companies indicated that SEC 
processes applications slowly, but none identified any financial 
consequences caused by such delays. SEC improved its timeliness in 
processing some applications in fiscal year 2004. 

While PUHCA allows qualified holding companies to be exempt from 
registering under the act either by applying for an SEC order or filing 
an annual self-certification form, SEC has not reviewed the activities 
of all exempt holding companies to ensure that they continue to qualify 
for exemptions. However, in 2004 the staff reviewed the exemptions of 
all 81 holding companies that claim exemption by self-certification, 
which could lead to the revocation of some claimed exemptions. In 
addition, the staff did not evaluate the exemptions of holding 
companies that are exempt by SEC order as part of this review. SEC 
plans to take further steps to strengthen its oversight of exempt 
companies, including revising the self-certification form to collect 
more relevant information from exempt companies.

SEC has not yet deemed an investor that owns less than 10 percent of 
the voting securities of a public utility or holding company to be a 
holding company, as defined in the act. SEC has typically granted no-
action relief to these investors. In considering these requests, staff 
must determine whether these investment structures contain consent 
rights that would allow an investor to exercise such a controlling 
influence over the management and policies of its invested entities as 
to necessitate regulation as a holding company under PUHCA. Over the 
past two decades, SEC staff has issued no-action letters to investors 
that have acquired an expanding list of consent rights over public 
utilities or other holding companies. 

What GAO Recommends:

GAO is making recommendations that could improve the effectiveness and 
efficiency of SEC’s oversight of registered holding companies and 
further enhance SEC’s monitoring of exempt holding companies. GAO is 
also making a recommendation designed to clarify when the staff may 
issue no-action letters to utility investors. In addition, GAO 
recommends that SEC conduct a study on the impact of its decisions and 
flexible interpretations on the statutory objectives of PUHCA. SEC 
agreed with some of the recommendations, but did not address others. 
Further, SEC did not address action plans for other recommendations as 
GAO believes are necessary.

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-617].

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Yvonne Jones at (202) 512-
8678 or jonesy@gao.gov.

[End of Section]

Contents:

Letter:

Results in Brief:

Background:

Some Concerns Exist about the Effectiveness and Efficiency of SEC's 
Regulation of Registered Holding Companies:

Exempt Company Oversight Has Been Limited, but Recent SEC Actions Are 
Designed to Strengthen It:

SEC Conducts Analysis and Discussions When Considering PUHCA No-Action 
Requests, Similar to Processes in Other Government Entities:

SEC Evaluates Controlling Influence on an Individual Basis, but No- 
Action Letters Reflect an Expanding List of Allowable Consent Rights:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Appendix II: Comments from the Securities and Exchange Commission:

Appendix III: GAO Contact and Staff Acknowledgments:

Table:

Table 1: Complexity of Registered Holding Company Systems in 1995 and 
2003:

Figures:

Figure 1: An Example of a PUHCA "Pretzel" Structure:

Figure 2: Number of Registered Holding Company Systems, 1995-2004:

Figure 3: SEC's Office of Public Utility Regulation Organizational 
Chart:

Figure 4: SEC's Process for Reviewing Applications Filed under PUHCA:

Figure 5: Overview of SEC's Examination Program:

Figure 6: SEC Estimates of Consumer Cost Savings as a Result of the 
PUHCA Examination Program:

Figure 7: Time Elapsed between PUHCA Applications Submitted in Fiscal 
Years 2003 and 2004 and the Issuance of Related Orders:

Abbreviations:

CFTC: Commodity Futures Trading Commission:

EWG: Exempt Wholesale Generator:

FERC: Federal Energy Regulatory Commission:

PUHCA: Public Utility Holding Company Act of 1935:

SEC: Securities and Exchange Commission:

Letter:
July 8, 2005:

The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:

The Honorable Edward J. Markey:
House of Representatives:

Congress passed the Public Utility Holding Company Act of 1935 (PUHCA 
or the act) to protect consumers and investors from abuses by holding 
companies with interests in gas and electric utilities.[Footnote 1] 
PUHCA, which is administered by the Securities and Exchange Commission 
(SEC), subjects public utility holding companies (holding company) to 
federal regulation. PUHCA defines a holding company, in part, as an 
entity that the Commission determines to exercise such a "controlling 
influence" over the management and policies of a public utility or 
holding company that it is necessary or appropriate in the public 
interest or for the protection of consumers and investors for the 
entity to be regulated as a holding company. PUHCA regulates several 
activities of registered holding companies, including the acquisition 
and issuance of securities, purchases and sales of utility assets, and 
transactions among affiliated companies. Also, PUHCA allows qualified 
holding companies to be exempt from regulation under the act by either 
applying for an SEC order or, in some circumstances, self-certifying 
that they satisfy the criteria for exemption annually.

Over the past two decades, several interested parties, including SEC, 
have advocated the repeal or amendment of PUHCA. To that end, several 
bills, and most recently the Energy Policy Act of 2005, have been 
introduced to either repeal or substantially amend the act.[Footnote 2] 
PUHCA's critics note that the act is outdated and has largely 
accomplished its goals of protecting investors and consumers. The act's 
critics also maintain that the act restricts the flow of capital into 
public utilities and obstructs ongoing efforts to restructure the 
utility industry. However, others have expressed concern that repealing 
PUHCA could cause the type of abuses that the utility sector 
experienced prior to PUHCA's enactment, such as financial manipulations 
and anticompetitive practices, to reoccur.

Several recent events have led to concerns about SEC's administration 
of the act. For example, questions have been raised as to why SEC has 
approved a number of mergers involving geographically dispersed utility 
systems, despite PUHCA's requirement that each holding company system 
be physically interconnected or capable of physical-interconnection and 
operate in a single region or area. Questions have also been raised as 
to how SEC reviews exempt holding companies to determine whether they 
satisfy the criteria for exemption from the act and how investors that 
have received no-action letters--or assurances that SEC staff will not 
recommend any enforcement action to the Commission--have been able to 
avoid regulation as holding companies, despite making substantial 
investments in and acquiring a number of rights over operational 
matters of public utilities or holding companies.

This report responds to your August 2004 request that we review issues 
relating to SEC's administration and enforcement of PUHCA. 
Specifically, our objectives were to determine (1) the nature and the 
extent to which SEC regulates registered holding companies and the 
results of its regulation, (2) the extent to which SEC reviews claims 
of exemption--filed as either self-certifications or applications for 
SEC orders--and the results of these reviews, (3) SEC's process for 
issuing no-action letters, and (4) how SEC determines whether companies 
have a controlling influence over public utilities or holding companies.

To address our objectives, we reviewed selected SEC workpaper files, 
pending applications, and recent orders. We conducted structured 
interviews with representatives of randomly selected registered holding 
companies and representatives of companies that have received PUHCA no- 
action letters since 2001, as well as with all SEC staff attorneys and 
accountants that have worked in the Office of Public Utility Regulation 
for over 6 months. We also interviewed senior SEC staff from the Office 
of Public Utility Regulation and officials from the Offices of the 
Chief Counsel within SEC's Divisions of Corporation Finance and 
Investment Management, SEC's Inspector General, the Commodity Futures 
Trading Commission (CFTC), the Federal Energy Regulatory Commission 
(FERC), interested industry groups, and other knowledgeable parties. In 
addition, we interviewed knowledgeable officials from the three major 
credit rating agencies, as well as officials from selected state 
utility commissions throughout the United States.

We conducted our work from August 2004 to July 2005 in Washington, 
D.C., and New York, N.Y., in accordance with generally accepted 
government auditing standards. Appendix I describes the objectives, 
scope, and methodology of our review in more detail.

Results in Brief:

SEC reviews applications of registered holding companies seeking SEC 
approval to engage in transactions regulated under the act. In 
addition, SEC conducts periodic examinations of registered holding 
companies, which focus on how costs are allocated within the holding 
company system and the effectiveness of internal controls. Currently, 
SEC tries to examine five holding company systems per year but plans to 
increase the frequency of these examinations to seven to eight per 
year. SEC officials estimated that steps taken by these companies to 
correct deficiencies identified in PUHCA examinations have resulted in 
consumer savings of over $450 million since fiscal year 1999, with most 
of the savings attributable to one holding company's reallocation of 
its tax benefits in fiscal year 2004. In addition, some registered 
holding companies we spoke with identified PUHCA forms and regulations 
that are outdated and may need revision. SEC staff is aware of some of 
these concerns and is currently developing recommendations for 
regulatory changes that could impact registered holding companies. Some 
actions that SEC has taken in recent years have led interested parties 
to conclude that SEC interprets PUHCA flexibly by allowing holding 
companies to have complex corporate structures and exposing them to 
more risk. SEC has indicated that a certain amount of flexibility in 
interpreting PUHCA is necessary in a changing utility industry to 
protect consumers and investors. Similarly, some industry participants 
have also observed that PUHCA restricts SEC's ability to respond to 
developments in the utility industry. Industry participants also raised 
concerns about the length of time SEC needs to process applications. 
For example, 8 of the 13 holding companies we spoke with indicated that 
SEC issues notices and orders in response to PUHCA applications either 
somewhat slowly or very slowly, although none identified any financial 
consequences as a result of SEC's delays. Although SEC improved its 
timeliness in processing some applications in fiscal year 2004, several 
registered companies pointed to inadequate staffing levels as a reason 
for SEC's slowness. Meanwhile, SEC staff attorneys and accountants 
attributed lengthy processing times to multiple layers of internal 
review by senior staff, among other possible reasons.

SEC has not conducted a thorough review of all exempt holding companies 
to ensure that they continue to qualify for an exemption from PUHCA and 
do not need to be subject to SEC regulation under the act. However, SEC 
has recently made efforts to improve how it oversees exempt holding 
companies. Specifically, in 2004, the staff conducted a review of all 
81 holding companies that claim exemption by self-certification, which 
could lead to the revocation of some exemptions. Nevertheless, SEC 
staff did not evaluate the utility activities of holding companies that 
are exempt by SEC order, as part of its review, because these companies 
are not generally required to regularly provide SEC with information 
about their utility activities. In fact, SEC cannot reliably estimate 
the number of holding companies that continue to operate under 
previously issued exemptive orders and continue to be entitled to such 
exemptions. For example, while the agency estimates that 50 holding 
companies are exempt by order, this figure does not include holding 
companies that received exemptive orders because they were incidentally 
or temporarily holding companies. SEC officials told us that the agency 
plans to continue to improve its oversight of exempt companies as time 
and staff resources allow. For example, SEC staff is currently 
reviewing the self-certification forms that companies submitted in 
2005. In addition, the staff plans to recommend a number of changes to 
the self-certification form that could allow the form to serve a more 
useful regulatory function.

SEC staff responds to requests for no-action relief from PUHCA by 
performing legal analyses about proposed transactions and sharing its 
opinions internally about whether to grant no-action relief. In 
addition to internal discussions, SEC staff also corresponds regularly 
with counsel for the requesting entities to help them clarify and focus 
their requests. This approach is similar to those of other SEC offices 
and CFTC, which also issue no-action letters.

SEC has historically evaluated the presence of controlling influence 
over the management or policies of a holding company or public utility 
on a case-by-case basis, considering factors such as the relationship 
between the holding company and the public utility, the nature of 
intercompany contracts, and whether there will be adequate oversight to 
protect consumers and investors. However, these cases all involved 
holding companies that own 10 percent or more of the voting securities 
of a public utility or a holding company. Although SEC has not yet 
declared an investor owning less than 10 percent of the voting 
securities of such companies to be a holding company, SEC staff has 
granted no-action relief to these types of investors seeking assurances 
that they are not holding companies. The staff's analyses of these no- 
action letter requests typically include a review of consent rights to 
be acquired by the investor in the proposed transaction to determine 
whether controlling influence is present. Since 1986, staff has issued 
no-action letters to investors that have proposed investment structures 
that include a growing number of consent rights over operational 
matters concerning the invested entities. As a result, some interested 
parties have called for SEC to clarify which consent rights would cause 
an investor to exert the necessary controlling influence to require 
regulation as a holding company. However, SEC staff explained that more 
explicit guidance on permissible consent rights would not be feasible 
because investors could structure future transactions with new or 
different combinations of consent rights. Nevertheless, it may be 
beneficial for SEC staff and investors for SEC to issue general 
guidelines setting forth minimum standards that utility investors must 
satisfy for the staff to find that they do not exert a controlling 
influence. These guidelines could help clarify for the staff as to when 
it is appropriate to issue a no-action letter and for the industry on 
how SEC determines whether a controlling influence is present.

This report makes recommendations designed to improve SEC's oversight 
of registered and exempt holding companies, as well as to clarify the 
conditions under which SEC staff may issue no-action letters to utility 
investors. These recommendations include establishing target time 
frames for processing PUHCA applications and creating an action plan 
for establishing time frames for making improvements to existing PUHCA 
forms and developing a system to collect and analyze information 
contained in companies' PUHCA filings to enable SEC staff to better 
monitor the activities of registered companies. We recommend that SEC 
expedite its planned evaluation of the different legal options for 
requiring companies that are exempt by order to provide additional 
information on their operations and create a plan for conducting future 
reviews of companies claiming exemptions. We also recommend that SEC 
develop and publish guidelines that set forth the minimum standards 
that utility investors must satisfy for the staff to find that they do 
not exert the necessary controlling influence to require regulation as 
a holding company. Finally, we recommend that SEC conduct a study on 
the impact of its administration of PUHCA in the last decade. We 
requested comments on a draft of this report from the Chairman, SEC. 
SEC provided written comments that are reprinted in appendix II. SEC 
noted that the agency has ongoing initiatives to improve its 
administration of the act and agreed with some of the recommendations, 
but did not address others. Further, SEC did not address whether it 
would develop action plans for other recommendations as we believe are 
necessary. SEC's comments are discussed in greater detail at the end of 
this report.

Background:

Prior to PUHCA, ownership of the nation's utilities was concentrated in 
a small number of holding companies. Many of these holding companies 
had developed complex, multistate structures, with highly diversified 
interests throughout the country. These structures triggered concerns 
that holding companies exploited consumers by charging excessive 
utility rates and investors by selling securities without providing 
adequate information on the conditions surrounding their issuance. The 
multistate character of these holding companies also obstructed 
effective state regulation of subsidiary utilities.

Basic Provisions of PUHCA:

In response to these concerns, PUHCA imposed a number of restrictions 
on registered holding companies to protect consumers and investors that 
include:

* Integration and simplification--Each holding company is generally 
limited to owning a single integrated public utility system, defined as 
a group of related operating properties confined in its operations to a 
single area or region, not so large as to impair the advantages of 
localized management, efficient operations and effective regulation. In 
addition, holding companies may only acquire nonutility businesses that 
are reasonably incidental or economically necessary or appropriate to 
the operations of an integrated utility system.[Footnote 3]

* Issuance and acquisition of securities and assets--SEC must approve 
the issuance of securities by a holding company or any of its 
subsidiaries. In particular, securities must be reasonably adapted to a 
company's earning power. SEC must also approve the acquisition by a 
holding company of any securities, utility assets or other business 
interests.[Footnote 4]

* Service company regulation--Service, sales, and construction 
contracts between a subsidiary of a holding company and any other 
company in the same holding company system must be performed 
"economically and efficiently" and be "equitably allocated" among 
subsidiaries.[Footnote 5]

* Upstream or intrasystem loans--PUHCA also prohibits holding companies 
from receiving "upstream" loans from any of its subsidiaries.[Footnote 
6]

PUHCA allows holding companies that meet any of five statutory criteria 
to apply for an order of exemption from registration under the act. 
Under Section 3 of the act, SEC must exempt a holding company from any 
provision of the act if it meets one of the following 
criteria:[Footnote 7]

* It and all of its utility subsidiaries from which it derives any 
material part of its income are predominantly intrastate in character.

* It is predominantly an operating public utility company and operates 
in the state in which it is organized and contiguous states.

* It is only incidentally a holding company.

* It is only temporarily a holding company.

* It is not principally a public utility business within the United 
States nor does it derive any material part of its income from public 
utility companies operating within the United States.

Holding companies can be exempt from registration under any of these 
provisions by applying for an SEC order. Alternatively, under Rule 2 of 
the act, companies that meet either of the first two criteria may claim 
exemption by making an annual self-certification filing on SEC Form U- 
3A-2 and be recognized as exempt without further action from 
SEC.[Footnote 8]

Except for Section 9(a)(2) of the act, exempt companies are generally 
not subject to SEC's continuing regulatory supervision.[Footnote 9] 
Under Section 9(a)(2), any affiliated company--including an exempt 
holding company--of a holding company or a public utility must obtain 
SEC approval before it acquires any security of an affiliated holding 
company or public utility.[Footnote 10]

Information on Holding Companies:

Section 2(a)(7) of PUHCA provides two definitions of a holding company. 
First, the act defines a holding company as a company that owns or 
controls 10 percent or more of the voting securities of a public 
utility or another holding company.[Footnote 11] The act also defines a 
holding company as an entity that the Commission determines, after 
notice and an opportunity for a hearing, to exercise such a 
"controlling influence" over the management or policies of a public 
utility or holding company that it is necessary or appropriate in the 
public interest or for the protection of investors and consumers for 
the utility to be regulated as a holding company.[Footnote 12] However, 
through an investment structure known in the utility industry as a 
"PUHCA pretzel," some investors have obtained SEC staff assurances that 
the staff will not recommend enforcement action against them. Thus, 
these investors have not registered or claimed exemption from the act. 
Under this investment structure, investors purchase less than 10 
percent of the voting securities--but a large percentage of the total 
equity through nonvoting interests--of a holding company, which 
directly or indirectly owns a public utility. In addition, investors 
acquire a series of rights--called consent rights--which would require 
the investor's consent before the invested entities could engage in 
various transactions, such as issuing securities or acquiring new 
assets. An example of this relationship is presented in figure 1.

Figure 1: An Example of a PUHCA "Pretzel" Structure:

[See PDF for image]

[End of figure]

As a result of heavy merger and acquisition activity within the utility 
sector, the number of holding companies that have registered under the 
act has more than doubled over the past decade, as shown in figure 2. 
As of December 31, 2004, 31 holding companies--which in turn owned an 
additional 25 intermediate holding companies--had registered under the 
act. This figure reflects a slight increase since December 2003, when 
29 parent holding companies with $653 billion in assets were registered 
under the act. By contrast, in June 1995, only 15 holding companies 
were registered under the act.

Figure 2: Number of Registered Holding Company Systems, 1995-2004:

[See PDF for image]

[End of figure]

Information on the Office of Public Utility Regulation:

The Office of Public Utility Regulation, which is part of SEC's 
Division of Investment Management, is responsible for administering 
PUHCA. SEC staff that works in this office reviews applications filed 
under the act, examines registered holding companies, and monitors 
industry activity, among other responsibilities. In addition, staff 
also issues "no-action letters," or assurances that it will not any 
recommend enforcement action to the Commission against entities seeking 
to engage in activities that may raise questions under the act. No- 
action letters often provide creditors with assurance that an entity 
seeking financing will not later be subject to enforcement action under 
PUHCA.

As of January 2005, the Office of Public Utility Regulation had 25 full-
time equivalents, including 17 attorneys, six financial analysts or 
accountants, and two support staff.[Footnote 13] The office is divided 
into three branches: Applications Branch #1, Applications Branch #2, 
and the Branch of Auditing and Financial Policy. Each branch is headed 
by one or more branch chiefs, who report directly to the Assistant 
Director. The Assistant Director is responsible for overseeing day-to-
day operations and reports to an Associate Director, who splits time 
between managing this office and another office within the Division of 
Investment Management. The Associate Director reports to the Director 
of the Division of Investment Management. The office also has two 
special counsels who review no-action requests, provide legal advice on 
rulemaking issues, and analyze and help formulate recommendations to 
the Commission concerning novel issues under PUHCA. Figure 3 provides 
an organizational chart of the Office of Public Utility Regulation.

Figure 3: SEC's Office of Public Utility Regulation Organizational 
Chart:

[See PDF for image]

[End of figure]

Other Utility Regulators:

In addition to SEC, other federal and state government entities also 
have oversight responsibilities for utilities. Both FERC and relevant 
state utility commissions generally must approve both the issuance of 
any securities that will finance utility operations and the acquisition 
of utility assets by utility companies.[Footnote 14] In addition, state 
utility commissions have jurisdiction over electric and gas utility 
companies that operate in their state. However, according to SEC, most 
state utility commissions do not have authority over the books and 
records of the holding companies of those utilities and have only 
limited authority to regulate affiliate transactions within holding 
company systems.

Some Concerns Exist about the Effectiveness and Efficiency of SEC's 
Regulation of Registered Holding Companies:

SEC regulates registered holding companies primarily by reviewing their 
PUHCA applications that seek SEC approval to engage in various 
transactions and conducting periodic examinations to identify 
improperly allocated costs and weak internal controls. SEC's current 
goal is to examine five holding company systems per year but plans to 
increase the frequency of these examinations. SEC officials estimated 
that these examinations have resulted in consumer savings of over $450 
million since fiscal year 1999 as a result of cost and tax benefit 
reallocations and improvements in the efficiency of 20 different 
holding company systems. However, roughly 72 percent of these cost 
savings were due to one company's reallocation of its tax benefits in 
fiscal year 2004. Some registered holding companies pointed out that 
several PUHCA forms and regulations are outdated and questioned the 
usefulness of some compliance requirements. Over the past decade, SEC 
has indicated that it is committed to interpreting PUHCA flexibly-- 
i.e., in a manner that recognizes technological advances and other 
trends in the utility industry. However, some industry participants 
have indicated that PUHCA restricts SEC's ability to respond to 
developments in the utility industry. On the other hand, some 
interested parties have raised concerns that this flexible approach has 
allowed some holding companies to have complex corporate structures and 
exposed them to more risk. In addition, some holding companies 
perceived SEC to be slow in issuing notices and orders in response to 
PUHCA applications, but none identified any financial consequences as a 
result of SEC's delays. While SEC improved its timeliness in processing 
some applications in fiscal year 2004, some companies suggested 
inadequate staff resources as a reason for SEC's slowness in processing 
applications. By contrast, many SEC staff attributed lengthy processing 
times to multiple layers of internal review.

SEC Reviews Applications of Registered Companies Using a Standardized 
Process:

SEC reviews applications of registered holding companies seeking 
authority to engage in transactions that are regulated under PUHCA 
using a standardized process. SEC regulations provide the staff with 
delegated authority to issue notices and orders in response to 
applications that do not present novel legal questions and for which no 
request for a hearing has been received.[Footnote 15] For transactions 
that also require approval from state commissions or other federal 
agencies, such as FERC, it is SEC's policy to wait until other 
regulatory bodies have approved the transaction before SEC will 
formally consider it. As shown in figure 4, upon receipt of a PUHCA 
application, senior SEC staff assigns a staff attorney and accountant 
to the filing. After internal consultations, staff may request 
additional information and amendments from the applicant. Staff will 
then summarize pertinent information from the application in a notice 
that appears in the Federal Register. After publication of the notice, 
interested parties have 25 days to request a hearing on the proposed 
transaction. If no requests for a hearing are received or the issue 
does not raise a novel legal question or public interest concerns, the 
staff will issue an order approving the proposed transaction. 
Otherwise, the Commission must issue the order or hold a hearing on the 
matter.

Figure 4: SEC's Process for Reviewing Applications Filed under PUHCA:

[See PDF for image]

[A] SEC may request additional information and amendments from 
companies after SEC issues a notice or order.

[End of figure]

SEC may not reject a PUHCA application without providing the applicant 
with an opportunity for a hearing. Over the past several years, only 
two applications have resulted in hearings. Both SEC officials and some 
registrants acknowledge that, because of the time and expense involved 
in participating in a formal proceeding, holding companies will usually 
revise the terms of their original applications to resolve differences 
of opinion with SEC informally. In its review of financing 
applications, one of SEC's objectives is to protect the financial 
integrity of registered holding companies by, for example, requiring 
holding companies and their utility subsidiaries seeking financing 
authority to have a equity-capitalization ratio of at least 30 percent. 
This aspect of SEC's administration of PUHCA--that is, a review of the 
financial condition of a registrant--differs from its administration of 
other securities statutes, in which SEC reviews security issuances 
primarily by promoting full and fair disclosure and preventing and 
suppressing fraud.[Footnote 16]

PUHCA Examinations May Lead to Consumer Cost Savings:

SEC also regulates registrants by conducting periodic examinations of 
their operations. These examinations focus on whether holding companies 
have proper internal controls to ensure financial integrity and whether 
costs are allocated equitably, economically, and efficiently among 
subsidiaries in the same holding company system. The examination manual 
issued in May 2003 indicated that the staff intends to examine up to 
five holding company systems per year so that all the registered 
systems would be examined on a 6-year cycle. The staff has taken steps 
to meet this goal by completing seven examinations between fiscal years 
2003 and 2004. Moreover, with the recent hiring of two new staff, SEC 
plans to begin examining seven to eight holding company systems per 
year.

Examination teams generally consist of five examiners from the Branch 
of Auditing and Financial Policy, with additional staff attorneys 
assigned, as needed. The examination team will also invite staff from 
other regulatory bodies, such as FERC and the relevant state utility 
commissions, which may have different examination objectives than SEC, 
to work alongside the examination team.[Footnote 17] The team will then 
review the public filings and other materials of the registered company 
it plans to examine. As shown in figure 5, the examination itself 
consists of three phases:

1. an initial desk audit, which lasts for up to two and a half months, 
during which the registered company will respond to a series of 
questions that SEC has about the company's operations and financial 
practices. In particular, these questions focus on how the holding 
company allocates costs among its subsidiaries and the internal 
controls that it has in place to ensure financial integrity;

2. a week-long, on-site examination during which examiners will 
interview internal and external auditors, as well as other key company 
officials; and:

3. a post on-site desk audit, which lasts for 2 to 3 months. SEC will 
then report its examination findings to the holding company and seek to 
resolve deficiencies it discovered with the holding company. Examples 
of these deficiencies may include unfair or inequitable cost allocation 
procedures and inconsistencies in a company's PUHCA filings.

Figure 5: Overview of SEC's Examination Program:

[See PDF for image]

[End of figure]

Unlike other securities statutes, PUHCA does not provide SEC with 
administrative enforcement authority such as the ability to issue cease 
and desist orders. Instead, SEC must seek injunctive relief in federal 
district court. Nevertheless, SEC officials explained that the vast 
majority of holding companies voluntarily resolve any compliance 
deficiencies with SEC, as companies generally want to maintain positive 
relationships with their regulators.

According to SEC estimates, between fiscal years 1999 and 2004, 
consumers saved as much as $458.2 million as a result of staff 
recommendations to reallocate costs and tax benefits within holding 
company systems and improve the efficiency of service company 
operations, as shown in figure 6. Over this period, SEC examination 
teams identified misallocated costs, tax benefits, and other 
inefficiencies within 20 holding company systems. However, according to 
one agency official, $330 million--or 72 percent--of the total cost 
savings is attributable to one parent holding company's reallocation of 
its tax benefits to an intermediate holding company in fiscal year 
2004. In addition, these figures may overstate the true benefit of 
PUHCA examinations to utility consumers. For example, SEC officials 
presume that the benefits of cost and tax benefit reallocations and 
other system improvements are passed down to consumers in the form of 
lower utility rates and that state utility commissions consider these 
improvements when setting rates. However, SEC generally does not 
provide affected state commissions with copies of its examination 
findings. Instead, state commissions must request the findings from the 
holding companies themselves, which are not obligated to disclose them. 
As a result, according to SEC staff, state commissions may not be aware 
when setting utility rates of the savings that SEC examiners identified.

Figure 6: SEC Estimates of Consumer Cost Savings as a Result of the 
PUHCA Examination Program:

[See PDF for image]

[A] Not including the $330 million of reallocated tax benefits within 
one holding company system, SEC's estimate of consumer cost savings 
would be less than $20 million in fiscal year 2004.

[End of figure]

Outdated Forms and Regulations May Decrease Efficiency of SEC's 
Regulation of Registered Companies:

Some registered holding companies indicated that they have to complete 
PUHCA forms and follow regulations that are outdated and may not serve 
a useful regulatory purpose.[Footnote 18] Specifically, 10 of the 13 
holding companies indicated that the annual report that registered 
holding companies must file requires them to disclose information that 
they already disclose to SEC under other securities statutes. A number 
of registrants also observed that it is not clear how SEC uses the 
information that companies provide in other filings, such as the 
quarterly report for energy-related or gas-related subsidiaries and the 
annual report for service companies. These holding companies observed 
that SEC rarely contacts them to clarify information in those filings, 
unless they are the subject of an examination. Similarly, in 2003, the 
SEC Inspector General also reported that many of the PUHCA forms are 
outdated, ineffective, or contain requirements that do not currently 
serve a useful regulatory purpose. In addition, some registered 
companies we spoke with indicated that Rule 70, which restricts the 
affiliations of members of a holding company's board of directors, may 
limit their ability to recruit and retain skilled directors.[Footnote 
19]

SEC officials are aware of some of these concerns and, as time and 
resources permit, plan to recommend a variety of regulatory changes 
that could impact registered companies. For example, officials 
indicated that they plan to simplify some forms to eliminate the filing 
of duplicate information that companies already submit in other SEC 
forms. One official also acknowledged that SEC may not review all 
companies' filings upon submission and told us that staff has discussed 
the possibility of developing a system that would collect relevant 
information contained in these filings. This type of system could help 
SEC better monitor the activities of registered companies on an ongoing 
basis and allow some PUHCA forms to serve a more useful regulatory 
purpose than they currently do. Officials also told us that they plan 
to recommend changes to Rule 70, which may be outdated in light of 
other securities acts and stock exchange rules that restrict the 
affiliations of company directors. Nevertheless, SEC officials 
indicated that they are limited from devoting significant time and 
attention to these initiatives due to available staff resources.

SEC's Flexible Approach in Administering Some Provisions of the Act 
Generates Both Support and Questions:

Some interested parties and SEC have observed that the agency 
administers parts of PUHCA flexibly. For example, in the last several 
years, SEC has approved a series of mergers involving utility systems 
that are separated by hundreds of miles and are connected by small 
connector lines or transmission systems owned by other utilities, 
despite the act's requirement that utility systems be geographically 
integrated and operate in a single area or region.[Footnote 20] SEC and 
some industry participants have stated that this flexibility is 
necessary to make the act relevant and protect consumers and investors 
in a rapidly changing industry, in which the geographic scope of energy 
service has greatly expanded. In addition, some industry participants 
have indicated that PUHCA restricts SEC's ability to respond to 
developments in the utility industry. Currently, SEC puts more emphasis 
on whether a merger or an acquisition will be economical and subject to 
effective regulation than on the integration requirements to recognize 
the changing environment of the utility industry. However, two public 
power organizations have raised concerns that SEC's interpretation of 
the integration requirements would effectively end enforcement of the 
act and encourage the formation of vast holding companies that the act 
was designed to prevent from recurring.[Footnote 21] Recently, an SEC 
administrative law judge made an initial ruling that one such merger-- 
between American Electric Power, an Ohio-based holding company, and 
Central and Southwest Corporation, a Texas-based holding company--did 
not satisfy PUHCA's single area or region requirement.[Footnote 22] 
American Electric Power has petitioned for Commission review of this 
decision.

Some interested parties have also raised concerns about the relaxation 
of restrictions on holding companies' ownership of nonutility 
subsidiaries. Through a series of statutory and regulatory amendments, 
both Congress and SEC have allowed registered holding companies to 
diversify into nonutility activities. For example, Congress amended 
PUHCA in 1992 to allow registered companies to own facilities called 
Exempt Wholesale Generators (EWGs), defined as companies engaged 
exclusively in the business of owning or operating facilities that 
generate and sell electricity at wholesale rates.[Footnote 23] In 
addition, in 1997, SEC adopted Rule 58, which provides an exemption 
from the requirement of prior SEC approval before registered companies 
and their utilities may acquire interests in certain types of 
nonutility energy-related or gas-related companies, including energy 
trading companies.[Footnote 24] As a result of these changes, the 
complexity of registered systems has grown tremendously. For example, 
in 1995, the 15 registered holding company systems consisted of less 
than 500 total companies. By contrast, the 29 systems that were 
registered, as of December 2003, consisted of over 6,500 total 
companies, including roughly 5,000 nonutility subsidiaries, as shown in 
table 1. While Congress and SEC have indicated that these changes were 
necessary to promote competition in the wholesale energy market and 
respond to the demands of a rapidly changing industry, some industry 
groups and credit rating agencies have stated that holding companies' 
diversification into unregulated activities has exposed registered 
companies to greater risks.

Table 1: Complexity of Registered Holding Company Systems in 1995 and 
2003:

Parent holding companies;
1995: 15;
2003: 29.

Intermediate holding companies;
1995: 0;
2003: 29.

Electric or gas utility subsidiaries;
1995: 106;
2003: 147.

Nonutility subsidiaries;
1995: 229;
2003: 4,999.

EWGs;
1995: 46;
2003: 125.

Foreign utility companies[A];
1995: 35;
2003: 167.

Inactive subsidiaries;
1995: 55;
2003: 1,012.

Total companies;
1995: 486;
2003: 6,508.

Source: SEC.

[A] Foreign utility companies, defined as utility companies that do not 
operate within the United States and do not derive any material income 
from U.S. sales, are generally exempt from the provisions of PUHCA.

[End of table]

SEC may also exercise flexibility when approving financing authority 
for financially troubled holding companies and their subsidiaries. For 
example, since fiscal year 2003, SEC has approved transactions for two 
companies, Allegheny Energy Inc. and Xcel Energy, Inc., and their 
subsidiaries to help them avert potential bankruptcy filings.[Footnote 
25] In both cases, although the companies were unable to meet SEC 
established thresholds for certain financial ratios,[Footnote 26] SEC 
authorized various transactions, including the payment of dividends by 
the subsidiaries to their parent companies out of capital and unearned 
surplus. According to agency officials, SEC needs to weigh the costs 
and benefits of approving transactions for financially troubled 
companies very carefully. They stated that because bankruptcy 
proceedings would hurt investors and may ultimately lead to higher 
utility rates for consumers, SEC generally grants registrants the 
necessary financing authority to help them avoid bankruptcy. In 
addition, SEC officials explained that they monitor the activities of 
financially-distressed holding companies closely. Nevertheless, in the 
Allegheny matter, one interested party recently raised concerns about 
Allegheny's commitment to improving its financial condition and asked 
SEC to take further steps to ensure that Allegheny's utility customers 
are adequately protected or hold a hearing on renewing the company's 
financing authority.[Footnote 27] However, in an April 2005 order that 
extended Allegheny's about-to-expire financing authority, the 
Commission denied the party's request for a hearing on the grounds that 
the request did not raise a material issue of fact or law in the 
context of the authority that the Commission did grant.[Footnote 28]

Some Parties Raised Concerns about Slowness in Processing Applications:

Several industry participants raised concerns about what they perceived 
to be delays in SEC approving PUHCA applications. Specifically, 8 of 
the 13 registered holding companies we spoke with indicated that SEC 
issues PUHCA notices and orders either somewhat slowly or very slowly. 
Nevertheless, no holding company could identify an instance in which 
SEC delays had ever caused it to miss a deadline that had financial 
consequences. While staff collects data to track the status of 
applications to allow managers and the Commission to monitor the 
office's productivity, the agency has no formal performance goals for 
how quickly it should issue PUHCA notices and orders. As a result, we 
had no benchmark against which to determine whether SEC's review of 
PUHCA applications is timely.

In 2003, the SEC Inspector General also found that some PUHCA 
applications may not be processed in a timely fashion and recommended 
that staff establish time frames for processing applications by, among 
other options, setting target dates for issuing notices and orders, on 
a case-by-case basis.[Footnote 29] However, SEC staff has not yet 
implemented the Inspector General's recommendation. According to agency 
officials, they are reluctant to establish strict time frames for 
issuing notices and orders because the complexity of applications can 
vary substantially. Nonetheless, the Inspector General's 
recommendation, if implemented, could help better manage how SEC 
processes applications while ensuring that the agency has flexibility 
to devote adequate time to reviewing novel applications.

Nevertheless, SEC improved its timeliness in issuing some orders in 
fiscal year 2004. For example, as shown in figure 7, SEC issued orders 
in response to almost 36 percent of the applications it received in 
fiscal year 2004 within 3 months, compared with 22 percent in fiscal 
year 2003. However, some applications may remain pending for much 
longer periods of time. SEC officials told us that the amount of time 
needed to issue notices and orders can vary widely, depending on the 
complexity and completeness of the original application. Further, some 
applications remain pending for long periods of time because the 
companies do not formally withdraw applications for transactions that 
they do not plan to consummate.

Figure 7: Time Elapsed between PUHCA Applications Submitted in Fiscal 
Years 2003 and 2004 and the Issuance of Related Orders:

[See PDF for image]

Note: As of December 20, 2004.

[End of figure]

Industry participants and SEC staff attributed SEC's slowness in 
processing applications to both inadequate staffing levels and multiple 
layers of internal review. For example, 5 of the 13 registered 
companies we spoke with indicated that SEC's staffing levels are less 
than adequate to administer PUHCA. Many industry participants noted 
that the recent increase in the number of registered companies has 
strained existing staff resources and could result in delays in 
processing applications. SEC's Inspector General reported in 2003 that 
staffing resources were inadequate to handle current workloads, 
resulting in insufficient time for rulemaking and monitoring exempt 
companies.[Footnote 30] SEC has recently taken steps to increase 
staffing levels in the Office of Public Utility Regulation by granting 
staff authority to hire three new employees. However, the two new staff 
members that have been hired so far were assigned to the Branch of 
Auditing and Financial Analysis, which assists in processing 
applications, but does not have primary responsibility for them. In 
addition, 14 of the 20 staff attorneys and accountants we spoke with 
observed that the lengthy processing times might be due to the multiple 
levels of internal review by senior agency officials. Although these 
layers of review could help ensure consistency in SEC's notices and 
orders, which is an important agency criterion, they frequently cause 
bottlenecks. Some staff also attributed processing delays to companies 
submitting incomplete applications or not providing SEC with additional 
information in a timely manner.

Exempt Company Oversight Has Been Limited, but Recent SEC Actions Are 
Designed to Strengthen It:

SEC has not systematically monitored the activities and exempt status 
of all holding companies that are exempt from PUHCA. However, SEC is 
taking steps to improve its oversight of exempt companies. In 2004, SEC 
staff conducted a review of all 81 holding companies claiming exemption 
from PUHCA by self-certification. According to SEC officials, further 
action may be taken as a result of this review, including steps that 
could lead to the revocation of some claimed exemptions. Despite this 
effort, SEC's review did not include all of the approximately 50 
holding companies that are exempt by order because these companies are 
not generally required to provide periodic information to SEC about 
their utility activities. In fact, SEC cannot reliably estimate how 
many companies that have received exemptive orders continue to be 
entitled to such exemptions. For example, while officials estimate that 
50 holding companies are exempt by order, this figure does not include 
holding companies that received exemptive orders because they are only 
incidentally or temporarily holding companies. As time and resources 
permit, SEC staff plans to continue its efforts to better monitor 
whether exempt companies remain eligible for exemption, but has not 
established how it plans to implement these improvements. In addition 
to conducting another review of all companies claiming exemption by 
self-certification, SEC staff plans to develop recommendations for 
improvements to the self-certification form that these holding 
companies file.

SEC Only Recently Conducted a Review of Exempt Companies but Not Those 
Exempt by Order:

While PUHCA provides SEC with broad authority to question and revoke 
the exemptions of holding companies that may be improperly claiming 
them, SEC has not undertaken a review of all holding companies that are 
exempt from PUHCA. As a result, the agency cannot ensure that all 
companies that have an exemption from PUHCA continue to qualify for an 
exemption and do not need to be subject to SEC's regulation under 
PUHCA. According to SEC officials, staff conducted reviews of the self- 
certification forms--called Form U-3A-2s--of holding companies that 
annually self-certify for exemption from PUHCA in 1998, 1999, and 2002. 
However, unlike the 2004 review, SEC could only devote limited 
resources in previous years to conducting these reviews. Moreover, in a 
2003 report, the SEC Inspector General found that SEC does not 
generally review Form U-3A-2s to determine whether holding companies 
that self-certified for exemption continue to qualify for their 
exemption.[Footnote 31]

SEC has recently improved how it oversees exempt holding companies. 
According to SEC officials, in 2004, a team of six SEC staff attorneys 
reviewed the Form U-3A-2s of all 81 holding companies that claim 
exemption from PUHCA by annual self-certification using a set of 
instructions on how to review the form. The instructions included a 
checklist to assist the attorneys in analyzing revenue information for 
the holding companies and their utility subsidiaries. The analysis of 
revenue information is a factor in determining whether a company can 
claim an exemption. According to SEC officials, as a result of this 
review, further steps may be taken, including steps that could lead to 
the revocation of some claimed exemptions.[Footnote 32] SEC staff 
undertook this review, in part, as a result of a recent Commission 
decision that denied Enron Corporation's applications for exemption 
from PUHCA. This decision helped clarify the criteria that holding 
companies must meet to engage in out-of-state wholesale energy sales 
through their utility subsidiaries and be eligible for exemption from 
the act.[Footnote 33] SEC officials told us that this decision had 
forced at least two exempt companies whose utility subsidiaries sell 
wholesale energy to reconsider their exemptions.

Staff did not evaluate whether companies that are exempt by order 
continue to qualify for an exemption as part of its 2004 review. In 
fact, SEC has no formal process to ensure that these companies still 
qualify for their exemption and, therefore, are not subject to SEC 
oversight because they are not required to provide SEC with periodic 
information showing that the circumstances that gave rise to their 
exemptions continue to exist. In addition, SEC cannot provide reliable 
estimates of the number of companies that have received exemptive 
orders that continue to meet the statutory definition of a holding 
company. For example, officials estimate that 131 holding companies are 
exempt from PUHCA, of which 50 companies are exempt by order. However, 
these figures do not include holding companies that received exemptive 
orders because they are only incidentally or temporarily holding 
companies.[Footnote 34] According to SEC officials, the agency exempted 
many companies from PUHCA that were only incidentally or temporarily 
holding companies in the 1930s and 1940s. However, because these 
companies do not regularly provide SEC with information about their 
utility activities, SEC may not know whether they still operate as 
holding companies or are still eligible for an exemption. SEC officials 
recognize this deficiency and plan to evaluate the different legal 
options for compelling companies that are exempt by order to provide 
SEC with additional information.

SEC Increases Focus on Monitoring Exempt Companies:

As time and resources permit, SEC plans to continue to take steps to 
improve its oversight of exempt companies. For example, SEC staff is 
currently reviewing the Form U-3A-2s that companies submitted in 2005, 
similar to its 2004 review. With the recent hiring of new staff, SEC 
has developed plans to better monitor the activities of exempt 
companies by regularly reviewing their credit ratings and public 
filings. While agency officials told us that they would like to 
formally review Form U-3A-2s as frequently as possible, they 
acknowledged that the demands of other office responsibilities limit 
them from conducting reviews of Form U-3A-2s annually. Also, the 
factors that SEC evaluates when reviewing self-certified exemptions may 
not change significantly from year-to-year.

In addition, SEC officials have indicated that they plan to recommend a 
number of changes to Form U-3A-2 that could allow it to serve a more 
useful regulatory purpose. In 2003, the SEC Inspector General found 
that this form is outdated and does not request the information 
necessary for SEC to determine whether a holding company should be 
exempt.[Footnote 35] For example, the form requires holding companies 
and their subsidiary utilities to quantify their out-of-state 
electricity and natural gas transactions in terms of kilowatt hours and 
cubic feet, but not dollars. However, SEC has primarily looked at the 
revenue that these companies derive from out-of-state transactions when 
evaluating whether holding companies are predominantly intrastate. 
Because Form U-3A-2 does not directly require the submission of revenue 
data, SEC staff may have to obtain such data from other forms or ask 
the companies for it directly. SEC officials told us that they are 
aware of existing deficiencies with Form U-3A-2 and that they plan to 
develop a series of recommendations to the Commission for changes to 
the form that they would like to implement before the end of this year.

SEC Conducts Analysis and Discussions When Considering PUHCA No-Action 
Requests, Similar to Processes in Other Government Entities:

SEC staff conducts legal analyses and engages in internal discussions 
before responding to requests for no-action relief from PUHCA. In 
addition, staff frequently corresponds with counsel for the requesting 
entities to help them revise their requests. This process is similar to 
processes used in other SEC offices and another federal government 
agency that issue no-action letters.

Staff Conducts Legal Analysis and Engages in Internal and External 
Discussions:

Based on our review of the workpaper files of 10 of the 15 companies 
that obtained PUHCA no-action letters between 2001 and 2004, we found 
that SEC staff reviews the legal analyses offered in the no-action 
request and engages in internal discussions about whether to grant no- 
action relief to the requester.[Footnote 36] The legal analysis 
consists of staff examining the facts of the proposed transaction and 
conducting legal research to determine if the proposed transaction is 
allowable under the act. In addition, the staff discusses the facts and 
the legal research with other staff involved in reviewing the request. 
The staff also corresponds regularly with counsel for the requesting 
entities to help them focus and clarify their requests. In response to 
the staff's concerns, requesting entities generally submit multiple 
draft requests before staff is willing to issue a no-action letter. 
However, if the staff determines that it is not appropriate to issue a 
no-action letter in response to a request, the staff will then give the 
outside counsel an opportunity to withdraw the request, which counsel 
generally does.[Footnote 37] SEC estimated that outside counsel 
withdraws approximately two PUHCA no-action letter requests each year. 
Nevertheless, SEC officials told us they were not aware of an instance 
in which the Commission had ever overturned a staff assurance contained 
in a no-action letter.

Staff's Process for Responding to PUHCA No-Action Letter Requests Is 
Similar to Processes in Other SEC Offices and CFTC:

SEC's process for responding to PUHCA no-action requests is similar to 
no-action letter processes in two other SEC offices and CFTC, the 
federal agency responsible for the regulation of commodity and 
financial futures and options.[Footnote 38] Staff from these three 
entities also reviews no-action requests internally, performs legal 
analyses, and often engages in substantial discussions with the 
requesting entities to help them focus or revise their requests, before 
issuing a no-action letter or, alternatively, asking that they withdraw 
their request.

SEC issues relatively few PUHCA no-action letters compared with CFTC 
and another SEC office. For example, between 2001 and 2004, SEC staff 
issued an average of fewer than 4 PUHCA no-action letters per year. By 
contrast, CFTC issued an average of 21 no-action letters per year 
between 2001 and 2004 and the Office of the Chief Counsel in SEC's 
Division of Corporation Finance told us it issued over 600 no-action 
letters in fiscal year 2004, of which 444 were for requests to exclude 
shareholder proposals from proxy statements. Staff attorneys are 
responsible for reviewing no-action letters at CFTC and in SEC's Office 
of the Chief Counsel within the Division of Corporation Finance. 
However, according to SEC officials, generally only senior SEC staff 
handles PUHCA no-action requests.

SEC Evaluates Controlling Influence on an Individual Basis, but No- 
Action Letters Reflect an Expanding List of Allowable Consent Rights:

SEC has historically evaluated investments by entities that raise 
concerns about controlling influence on an individual basis. In making 
these decisions, SEC has paid particular attention to the relationship 
between the holding company and the public utility, the potential for 
excessive charges to the utility through intercompany contracts, and 
the adequacy of regulatory oversight over the holding company and its 
public utility subsidiaries. To date, SEC has never formally declared 
an investor that owns less than 10 percent of the voting securities of 
a public utility or holding company to be a holding company. However, 
in the absence of formal Commission precedent, SEC staff has issued a 
series of no-action letters to entities seeking to acquire less than 10 
percent of the voting securities of such companies.[Footnote 39] In 
addition, over the past several years, SEC staff has granted no-action 
relief to investors that have proposed to exercise an increasing number 
of consent rights over certain operational matters of the invested 
entities. While some interested parties have indicated that SEC should 
clarify which consent rights would cause an investor to exercise such a 
controlling influence so as to necessitate regulation of the investor 
as a holding company under PUHCA, one SEC official told us that clearer 
guidance on this issue may not prevent investors from structuring 
future investments with new or different combinations of consent 
rights. However, general guidelines about minimum standards that an 
investor must satisfy for the staff to issue a no-action letter may 
help clarify how the staff interprets controlling influence.

SEC Evaluates Controlling Influence on a Case-by-Case Basis:

In past decisions, SEC has found that the presence of controlling 
influence needs to be evaluated on an individual basis and that the 
specific circumstances surrounding an investment need to be 
considered.[Footnote 40] In making its decisions, SEC has focused on 
the past and current relationship between the holding company and the 
public utility, the nature of intercompany contracts, and whether 
investors and consumers will be subject to adequate regulatory 
oversight.[Footnote 41] However, SEC has only ruled on controlling 
influence when considering applications from companies presumed to be 
holding companies by virtue of their 10 percent ownership that are 
seeking declarations that they are not holding companies. By contrast, 
PUHCA presumes that investors that own less than 10 percent of the 
voting securities of a public utility or holding company are not 
holding companies unless SEC determines that it is necessary or 
appropriate in the public interest or for the protection of consumers 
or investors to regulate the investor as a holding company. To date, 
SEC has not made such a determination. Therefore, SEC has no 
established precedent with respect to factors that have led SEC to 
conclude that a less than 10 percent investor exercised such a 
controlling influence over a holding company or public utility that it 
was necessary to subject the investor to the requirements of PUHCA.

Instead, companies with less than 10 percent of the voting securities 
of a public utility or holding company have sought no-action relief 
that they would not be considered holding companies under PUHCA. Since 
1986, SEC staff has issued a series of no-action letters to entities 
seeking assurances that ownership of less than 10 percent of the voting 
securities of a holding company would not cause them to be holding 
companies themselves within the meaning of the act. These no-action 
letters have involved investors that have sought to acquire substantial 
interests in holding companies through limited partnership interests or 
nonvoting preferred stock.[Footnote 42] However, to avoid coming within 
the definition of a holding company and thereby risk having to divest 
many of its nonutility investments, the investor will acquire less than 
a 10 percent interest in the voting securities of the holding company. 
To protect their investments, these investors will also acquire certain 
consent rights over the operations of the invested entities. These 
rights may include the power to approve security issuances and capital 
expenditures in excess of budgeted amounts, among others. In 
considering these requests, staff must determine whether these consent 
rights would enable the investor to vote in the direction or management 
of the affairs of such companies or cause an investor to exercise a 
controlling influence over the management and policies of a public 
utility or holding company.

SEC No-Action Letters Have Allowed a Growing List of Consent Rights:

In recent years, SEC staff has granted no-action assurances to 
investors that have proposed to exercise an increasing number of 
consent rights over their invested entities. The growth in the number 
and range of these consent rights has raised concerns by some parties 
that staff may be exercising too much discretion in determining whether 
controlling influence is present. The following example illustrates how 
SEC staff has granted no-action letters to investors that have proposed 
to exercise more substantial consent rights over operational matters. 
In a no-action letter from 1986, staff granted relief to two investors 
that proposed only the right to approve the admission of new partners 
into the limited partnership and to continue the limited partnership in 
the event of bankruptcy or withdrawal of the general partner.[Footnote 
43] By comparison, staff has recently granted no-action assurances in 
circumstances in which a single investor could essentially veto 
proposed sales of significant businesses or assets of the operating 
utility, employment contracts with utility executives, changes to the 
holding company's annual operating budgets, votes of the holding 
company's ownership interests in the utility subsidiary, and issuances 
of additional securities by the holding company.[Footnote 44]

Some interested parties have expressed concern about the number of 
consent rights that utility investors have acquired and have indicated 
that SEC should more clearly specify which consent rights would cause a 
utility investor to exercise a controlling influence. SEC staff 
observed that more explicit guidance on consent rights may not prevent 
similar investments in the future because in theory an infinite number 
and combination of consent rights exist that would allow an investor to 
exercise more or less control over an invested entity. If SEC specified 
that certain consent rights would cause an investor to exert a 
controlling influence and, therefore, be a holding company within the 
meaning of the act, subsequent investors in public utilities or holding 
companies may propose new or different combinations of consent rights 
over invested entities when they structure future transactions to avoid 
exercising a controlling influence. Thus a list of specific consent 
rights that would cause a utility investor to exercise a controlling 
influence may not address all possible combinations of consent rights. 
However, it may be appropriate for SEC to issue general guidelines 
setting forth minimum standards that utility investors must satisfy for 
the staff to find that they do not exercise a controlling influence 
over the management and policies of public utilities or holding 
companies. These guidelines could help clarify for the staff as to when 
it is appropriate to issue a no-action letter and for the industry on 
how SEC staff determines whether controlling influence is present.

Conclusions:

In administering PUHCA, SEC is charged with the difficult task of 
regulating a rapidly changing industry. Within the past decade, SEC has 
said that a flexible approach to administering the act is necessary to 
protect consumers and investors in this changing environment. 
Accordingly, SEC has approved a series of mergers between 
geographically-dispersed utility systems; it removed some restrictions 
on holding companies' diversification into some nonutility activities; 
and it issued no-action letters to utility investors that have proposed 
to acquire a growing list of consent rights over operational decisions 
of public utilities and holding companies. However, it is unclear 
whether or how these collective decisions and actions have served the 
interests of utility consumers and investors. With this continuing 
uncertainty, it may be appropriate for SEC to conduct a study, in 
collaboration with other knowledgeable parties, to re-examine the 
collective impact of its recent decisions and actions in administering 
PUHCA on consumers, investors, and the public interest.

Regardless of the debate on SEC's interpretations of the act, there are 
steps that SEC can take to better manage the processes involved in 
administering the act. SEC devotes most of its available resources for 
administering PUHCA to handling applications from registered holding 
companies and has struggled to devote adequate resources to other 
responsibilities such as rulemaking, reviewing incoming PUHCA filings, 
and monitoring exempt companies. Consequently, SEC continues to 
administer the act with ineffective forms and without a comprehensive 
system to collect data and monitor the activities of both registered 
and exempt holding companies. Although SEC staff is aware of outdated 
forms and regulations that need revisions, it can only undertake 
planned initiatives as time and resources permit. Developing a formal 
strategy that prioritizes forms and regulations to be revised and 
establishes time frames for their referral to the Commission would 
improve the likelihood of timely completion of high priority 
initiatives. Further, systematically analyzing data from registrant 
filings could provide another tool for SEC staff to oversee registered 
companies. Despite the fact that many industry participants perceive 
that SEC processes PUHCA applications slowly, the staff has not 
implemented suggestions that it establish time frames for issuing 
notices and orders. Moreover, since most of today's holding companies 
are exempt from SEC's oversight under PUHCA, it is important that SEC 
monitor the activities of exempt companies and determine whether the 
continuation of exempt status for all exempt companies is in the best 
interest of the public, investors, and consumers. Finally, because the 
staff has granted no-action assurances to utility investors that are 
acquiring a growing number of consent rights over operational matters 
of holding companies and public utilities, clearer SEC guidance on the 
minimum standards that a corporate structure must satisfy may help 
inform the staff's determination about when a no-action letter is 
appropriate and clarify to investors which types of investment 
structures would cause them to be holding companies within the meaning 
of the act.

Recommendations for Executive Action:

As long as SEC continues to have the responsibility to administer 
PUHCA, we recommend that the Chairman, SEC, take the following two 
actions to improve the timeliness and quality of SEC's activities 
related to its oversight of registered holding companies:

* Implement the SEC Inspector General's recommendation for establishing 
time frames and target dates for assigning, reviewing, and issuing 
notices and orders on a case-by-case basis.

* Develop an action plan to establish and meet time frames for making 
improvements to existing PUHCA forms and developing a system to collect 
and analyze information contained in PUHCA filings to enhance SEC's 
ability to better monitor registered holding companies, while reducing 
the overall regulatory burden on these companies.

Although SEC has recently conducted a review of all companies exempt by 
self-certification, we recommend that the Chairman, SEC, further 
enhance SEC's monitoring of exempt companies by taking the following 
two steps:

* Expedite the evaluation of the different legal options and obtain the 
necessary legal authority for requiring companies that are exempt by 
order to provide additional information on their operations.

* Create a formal strategy to conduct comprehensive reviews of 
companies claiming exemptions on a periodic basis and expand the focus 
of these reviews to include companies that claim exemption by order.

In light of the growing number of consent rights that utility investors 
have acquired over operational matters of holding companies and public 
utilities, we recommend that the Chairman, SEC:

* Develop and publish general guidelines that articulate minimum 
standards that an investor seeking to acquire an interest in a holding 
company or public utility must satisfy in order to receive a no-action 
letter. Examples of these minimum standards could include that a 
majority of the members of the public utility's or holding company's 
board of directors not be affiliated with the investor or that any 
consent rights be limited to those necessary to protect the investor 
from unilateral action by a majority investor.

Finally, given the changes that are taking place in the utility 
industry and current debates about SEC's actions in administering 
PUHCA, including the agency's interpretations of the single area 
requirement and its interpretations of a controlling influence, we 
recommend that the Chairman, SEC:

* Conduct a study on the impact of SEC's administration of PUHCA in the 
last decade and, if necessary, make legislative proposals. The study 
should examine whether its decisions and flexible interpretations 
facilitate consumer and investor protection and enable companies to 
provide energy to the nation's consumers in an efficient and 
competitive manner. In conducting this study, SEC should gather the 
views of the utility industry, consumer groups, trade associations, 
investment banks, rating agencies, economists, and relevant state and 
federal regulators.

Agency Comments and Our Evaluation:

SEC provided written comments on a draft of this report that are 
reprinted in appendix II. SEC also provided technical comments, which 
were incorporated into the final report, as appropriate. SEC agreed 
with some of our recommendations but did not address others. SEC 
commented on the need to interpret PUHCA in a manner that reflects the 
changes in the utility industry without creating unnecessary risks for 
investors or utility customers. SEC did not specifically address the 
need to provide guidance on consent rights but agreed that there are 
areas in which the agency can offer further guidance and, in 
appropriate circumstances, reexamine prior interpretations of the act.

SEC agreed that it is important to continue to monitor the status of 
all exempt companies and particularly to monitor those companies' 
continuing entitlement to exemptions. However, SEC did not address the 
need for the creation of a formal strategy, but noted that staff is 
involved in an ongoing project to review and, where necessary, improve 
their ability to monitor the activities of all exempt holding companies.

SEC agreed that updating some of the forms that holding companies are 
required to file would make it more efficient for SEC to obtain the 
information necessary to regulate holding companies and also reduce the 
unnecessary burdens on these companies by eliminating duplicative or 
unneeded filing requirements. To this end, SEC staff will continue to 
make recommendations for updating the forms as necessary. However, SEC 
did not address the need to establish an action plan for such 
improvements. SEC also did not directly address our recommendation on 
establishing time frames and target dates for reviewing and issuing 
notices and orders. We continue to believe that establishing such time 
frames would be beneficial for SEC's oversight of registered holding 
companies by improving the timeliness of the agency's activities.

Finally, SEC noted that the agency informally assesses its 
administration of PUCHA on a regular basis but agreed to seriously 
consider the possibility of doing a formal study.

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies of this report 
to the Chairman, House Committee on Energy and Commerce and other 
interested Members of Congress. We also will send copies to the 
Chairman of SEC and will make copies available to others upon request. 
In addition, the report will be available at no charge on the GAO Web 
site at [Hyperlink, http://www.gao.gov.]

If you or your staff have any questions about this report, please 
contact me at (202) 512-8678 or [Hyperlink, jonesy@gao.gov.] Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. GAO staff that made major 
contributions to this report are listed in appendix III.

Signed by:

Yvonne D. Jones:
Director, Financial Markets and Community Investment:

[End of section]

Appendixes:

Appendix I: Objectives, Scope, and Methodology:

Our objectives were to determine (1) the nature and extent to which the 
Securities and Exchange Commission (SEC) regulates registered holding 
companies, (2) the extent to which SEC reviews claims of exemption-- 
filed as either self-certifications or applications for SEC order--from 
the act, (3) SEC's process for issuing Public Utility Holding Company 
Act of 1935 (PUHCA) no-action letters, and (4) how SEC determines 
whether companies have a controlling influence over public utilities or 
holding companies. However, as agreed with our requesters' staff, we 
did not evaluate the arguments for or against PUHCA's repeal.

To determine the nature and extent to which SEC regulates registered 
holding companies, we used a number of methodologies, including reviews 
of publicly available documents, structured and open-ended interviews, 
data analysis, and workpaper reviews. For example, we reviewed PUHCA, 
SEC's associated regulations, and other publicly available documents to 
understand the various statutory and regulatory provisions that govern 
SEC's responsibilities. We followed topical issues that affect SEC's 
work by reviewing applications that were pending, as of December 2004, 
and recently issued orders available through SEC's Web site, as well as 
industry press reports. We also attended and obtained documents filed 
as part of SEC's 2005 administrative procedure involving the American 
Electric Power and Central and Southwest Corporation merger to monitor 
developments in that hearing.

Also, we conducted a series of interviews with SEC officials to 
understand and seek clarification on key points about how SEC regulates 
registered companies and topical issues involving registered companies. 
We asked utility experts and interested industry groups, including a 
past SEC official, the head of a PUHCA working group, the American 
Public Power Association, the National Rural Electric Cooperative 
Association, the Edison Electric Institute, the National Association of 
Regulatory Utility Commissioners, and Public Citizen for their views on 
SEC's administration of the act. We spoke with officials from other 
regulatory bodies, including the Federal Energy Regulatory Commission 
(FERC), SEC's Division of Corporation Finance, and representatives from 
four state utility commissions about the extent of their coordination 
with SEC on issues pertaining to PUHCA. We met with officials from the 
three major credit rating agencies and other Wall Street officials 
about the effect of SEC's administration of PUHCA on the financial 
health of public utilities and holding companies. We also spoke with an 
official from SEC's Office of the Inspector General to better 
understand the methodologies used and findings presented in a recent 
Inspector General audit on the regulation of holding companies.

In addition, we conducted structured interviews with officials from a 
random selection of 13 of the 31 registered holding companies to 
solicit registrants' opinions about their regulator. We also conducted 
structured interviews with all 20 SEC staff attorneys and accountants 
with more than 6 months of on-the-job experience working on PUHCA to 
obtain their opinions about SEC's internal processes and procedures.

Furthermore, we reviewed SEC workpapers from two recent examinations to 
better understand SEC's processes and procedures for examining 
registrants. We then obtained and analyzed SEC data on consumer cost 
savings as a result of its examination program. In addition, we 
obtained and analyzed SEC data on the amount of time that has elapsed 
between the submission of PUHCA applications in fiscal years 2003 and 
2004 and the issuance of related notices and orders to evaluate how 
quickly SEC processes applications.

To assess the extent to which SEC reviews claims of exemption from the 
act, we relied on structured and unstructured interviews and reviews of 
both publicly available documents and information collected from SEC. 
For example, we reviewed Section 3 of the act, which describes the 
statutory provisions under which SEC can exempt--and revoke the 
exemptions of--holding companies from PUHCA, as well as Rules 2 through 
6, which implement the act's exemptive provisions. We also reviewed the 
administrative law judge's and the Commission's decisions In the Matter 
of the Applications of Enron Corp., documentation of SEC's policy for 
reviewing Form U-3A-2s in 2004, and publicly available documents that 
discuss SEC's procedures and policies for reviewing claims of exemption 
to gain an understanding of the criteria that SEC uses to evaluate 
Section 3(a)(1) exemptions. We obtained and analyzed data from SEC on 
the number of exempt holding companies. We also obtained and analyzed a 
blank Form U-3A-2 from SEC's Web site to determine whether that form 
collects adequate information for SEC to monitor companies claiming 
exemption under Rule 2.

We spoke with SEC officials to understand SEC's process for reviewing 
Form U-3A-2s in 2004 and to get clarification on key points, such as 
the reason that some applications for exemptive orders are currently 
pending. As part of our structured interviews with 13 registered 
holding companies and 20 SEC staff attorneys and accountants, we 
inquired about their opinions of SEC's processes for reviewing 
exemptions. We also spoke with FERC and state utility commissions to 
determine how SEC coordinates with other regulatory bodies in reviewing 
exemptions. As necessary, we spoke with other knowledgeable subject 
matter experts and industry groups about how SEC reviews claims of 
exemption to solicit the opinions of third parties.

To determine SEC's process for issuing PUHCA no-action letters, we 
spoke with a variety of government officials both inside and outside 
SEC. After speaking with SEC officials to understand SEC's process for 
issuing PUHCA no-action letters, we selected three other entities, both 
within and outside of SEC, that regularly issue no-action letters 
against which we could compare SEC's no-action letter process under 
PUHCA. These entities were the Office of the Chief Counsel within SEC's 
Division of Investment Management, the Office of the Chief Counsel 
within SEC's Division of Corporation Finance, and the Commodity Futures 
Trading Commission (CFTC). We then spoke with knowledgeable officials 
from each entity to understand their processes for issuing no-action 
letters. We also spoke with officials from the Federal Communications 
Commission and FERC about any comparable procedures at those agencies. 
However, officials at those two agencies were not aware of any no- 
action letters that they issue. In addition, we spoke with an official 
from SEC's Office of the Inspector General to better understand the 
methodologies used and findings presented in a recent Inspector General 
audit on the Division of Investment Management's no-action letters.

Further, we conducted structured interviews with representatives from a 
randomly selected sample of 6 of the 15 companies that have received 
PUHCA no-action letters between 2001 and the present to learn about 
their experiences in seeking no-action relief through SEC. In addition, 
we reviewed several no-action letters issued since 2001, all of which 
are available on SEC's Web site, and obtained and analyzed SEC 
workpaper files from 10 no-action letters issued between 2001 and 2004 
to assess the amount and types of interaction that occur between the 
requesting entity and SEC staff prior to the issuance of a final 
letter. We also reviewed publicly available documents about no-action 
letters, including SEC releases and CFTC regulations, to gain an 
understanding of the criteria that agencies use when processing no- 
action letter requests.

To asses how SEC determines whether companies have a controlling 
influence over public utilities or holding companies, we performed a 
legal analysis of publicly available documents, including Section 2 of 
PUHCA, past SEC orders and no-action letters related to controlling 
influence, and the Division Investment Management's responses to 
inquiries from the House Energy and Commerce Committee about SEC's 
administration of PUHCA. We also spoke with SEC officials to gain a 
more thorough understanding of the staff's interpretation of this 
provision of the act.

We conducted our work in Washington, D.C., and New York, N.Y., from 
August 2004 to June 2005 in accordance with generally accepted 
government auditing standards.

[End of section]

Appendix II: Comments from the Securities and Exchange Commission:

United States Securities And Exchange Commission:
Washington. D.C. 20549:
Division Of Investment Management:

June 21, 2005:

Ms. Yvonne D. Jones:
Director, Financial Markets and Community Investment:
United States Government Accountability Office:
Washington, D.C. 20548:

Dear Ms. Jones:

Thank you for the opportunity to comment on your draft report 
concerning the SEC's administration of the Public Utility Holding 
Company Act of 1935. The report provides a detailed summary of the 
structure and operation of the Commission's Office of Public Utility 
Regulation. The report also addresses, among other things, the savings 
produced by the Commission's examination program, the Commission's 
administration of the exemptive provisions of the Act and the 
Commission's approach to those provisions of the Act that determine 
whether one entity "controls" another.

Your report describes many difficult policy issues that the SEC has 
faced as part of its administration of the Act in recent years. These 
issues include, among others, the extent of merger activity permitted 
under the Act, the permissible geographic size of holding companies, 
the scope of the Act's exemptive provisions and the ability of 
utilities and utility holding companies to use novel structures to 
attract investors and capital into the utility industry. These issues 
have arisen for a variety of reasons, including amendments made to the 
Act, changes in the manner the utility industry is regulated by the 
Federal Energy Regulatory Commission and state commissions, 
technological change and, most fundamentally, the changing nature of 
the utility business.

In addressing these issues in recent years, the SEC has always 
attempted to interpret the Act in a manner designed to achieve the 
Act's goals while at the same time responding to the nature and needs 
of the utility industry as it exists now, rather than the form in which 
the industry existed when the Act was enacted in 1935. Specifically, 
the Act itself establishes two fundamental goals - protecting those who 
invest in the securities issued by holding company systems and 
protecting utility consumers. In making any decision under the Act, we 
always strive to achieve these goals. We also recognize the fundamental 
importance of the utility industry to our nation's economic success and 
to our national security. We therefore believe that we have an 
obligation to administer the Act in a way that reflects how changing 
technology, changing regulation and changes in the capital markets 
impact utilities and holding company systems. Indeed, we believe that 
if we did not respond to these changes, we might not only damage our 
nation's utility system, but we could also harm the very interests that 
the Act directs us to protect.

While we believe that we have been largely successful in administering 
the Act in this fashion, we recognize, as the GAO report suggests, that 
there are areas in which we can offer further guidance and, in 
appropriate circumstances, reexamine prior interpretations of the Act. 
Indeed, given the fast pace of change in the industry, there is no way 
for us to successfully administer the Act without continually analyzing 
how the goals of,the Act can be best achieved. We remain committed to 
providing this guidance to the industry and, most fundamentally, to 
interpreting the Act sensibly without creating unnecessary risks for 
investors or utility customers.

The draft GAO report also describes the approach that we have taken in 
recent years to reviewing the status of exempt holding companies under 
the Act. In particular, the draft report notes that, given current 
filing requirements, it is easier for us to monitor the activities of 
holding companies that claim exemption pursuant to Rule 2 under the Act 
as opposed to holding companies that have obtained their exemptions by 
Commission order. We agree that it is important to continue to monitor 
the status of all exempt companies, and particularly to monitor those 
companies' continuing entitlement to exemption. Staff in the Office of 
Public Utility Regulation are therefore involved in an ongoing project 
to review and, where necessary, improve our ability to monitor the 
activities of all exempt holding companies. This project will enable us 
to more efficiently maintain an appropriate distinction between exempt 
and registered holding companies.

Your report also notes that a number of the forms we require holding 
companies to file are due to be updated. While we do not believe that 
the current filing requirements have impaired our ability properly to 
administer the Act, we recognize that updating forms serves two 
important goals. First, by updating our forms, our processes for 
obtaining the information necessary to regulate holding companies will 
become more efficient. Second, updating our forms will also allow us to 
reduce unnecessary burdens on holding companies by eliminating filing 
requirements that are either duplicative or unneeded. Our staff is thus 
continuing to develop recommendations for updating our forms as 
necessary.

Finally, the GAO report recommends that the SEC undertake a study to 
systematically review the changes that have occurred in the utility 
industry during the past ten years and the manner in which our 
administration of the Act during that period has affected the utility 
industry, its investors and the customers of its utilities. We agree 
that it is always important to review our administration of the Act, 
particularly in times when the industry is changing rapidly, and to 
assess the success of our past policy decisions. We believe that we 
perform this assessment informally on a regular basis. In light of your 
recommendation, however, we will seriously consider the possibility of 
doing a more extended and formal study.

We appreciate the GAO's attention to these issues.

Sincerely,

Signed by:
David B. Smith. Jr.:
Associate Director:

[End of section]

Appendix III: GAO Contact and Staff Acknowledgments:

GAO Contact:

Yvonne D. Jones (202) 512-8678:

Staff Acknowledgments:

In addition to the individual named above, Jon Altshul, Marc Molino, 
Omyra Ramsingh, LaSonya Roberts, and Karen Tremba made key 
contributions to this report.

(250213):

FOOTNOTES

[1] Public Utility Holding Company Act of 1935, ch. 687, Title I, 49 
Stat. 803 (1935) (codified as amended at 15 U.S.C. §§ 79 - 79z-6 
(2000)). 

[2] See, for example, H.R. 6, 109TH Congress (2005) and S. 10, 109TH 
Congress (2005); H.R. 6, 108TH Congress (2003); H.R. 1627, 108TH 
Congress (2003); H.R. 1644, 108TH Congress (2003); H.R. 4503, 108TH 
Congress (2004); S. 14, 108TH Congress (2003); S. 475, 108TH Congress 
(2003); S. 1005, 108TH Congress (2003); and S. 2095, 108TH Congress 
(2003). 

[3] 15 U.S.C. §§ 79b(a)(29) and 79k(b)(1).

[4] 15 U.S.C. §§ 79g(d) and 79i(a)(1).

[5] 15 U.S.C. § 79m(b).

[6] 15 U.S.C. § 79l(b).

[7] However, SEC may deny an exemption if it finds that an exemption 
would be detrimental to the public interest or the interest of 
consumers and investors. 15 U.S.C. § 79c(a). 

[8] 17 C.F.R. § 250.2 (2004).

[9] 15 U.S.C. § 79i(a)(2).

[10] PUHCA defines an affiliate company to include an entity that owns 
5 percent or more of the voting securities of another company. 15 
U.S.C. § 79b(a)(11).

[11] 15 U.S.C. § 79b(a)(7)(A). 

[12] 15 U.S.C. § 79b(a)(7)(B). 

[13] These figures of full-time equivalents do not include the 
Associate Director or the Director of Investment Management. 

[14] The authority of state utility commissions varies from state to 
state.

[15] 17 C.F.R. §200.30-5. However, the Commission must issue orders for 
applications that raise novel legal questions or at the discretion of 
the Director of the Division of Investment Management.

[16] However, under Rule 15c3-1 of the Securities Exchange Act of 1934, 
SEC requires registered broker-dealers to maintain minimum net capital 
ratios that would allow them to meet obligations to customers and other 
market participants and to provide a cushion of liquid assets to cover 
potential market, credit, and other risks. 17 C.F.R. § 240.15c3-1.

[17] FERC usually declines SEC's invitation. In addition, SEC will seek 
the holding company's permission before inviting state regulators to an 
examination, as most state statutes restrict states' authority over 
holding companies. 

[18] SEC can only amend PUHCA forms through rulemaking initiatives. 

[19] 7 C.F.R. § 250.70. 

[20] Section 10(c)(1) and, by reference, Section 11(b)(1) of PUHCA 
require SEC to find that the utility operation to be acquired by a 
holding company, when combined with its existing utility operations, 
will result in a "single integrated public-utility system." See 15 
U.S.C. §§ 79j(c) and 79k(b)(1). PUHCA defines a "single integrated 
public utility system" with respect to an electric utility, in 
pertinent part, as one that is physically interconnected or capable of 
interconnection and operates in a single area or region. See 15 U.S.C. 
§ 79b(a)(29)(A). Examples of acquisitions that SEC concluded satisfied 
the "integration" requirement include mergers in 2000 between Northern 
State Power Company (Minnesota and Wisconsin) and New Century Energies 
(Colorado, New Mexico and Texas) to form Xcel Energy and between PECO 
(Pennsylvania) and Unicom Corporation (Illinois) to form Exelon. See 
New Century Energies, Inc. and Northern States Power Company; 2000 WL 
1160583 (2000) (Approval Order) and Exelon Corporation, 73 S.E.C. 1336 
(2000) (Approval Order). 

[21] See Statement of Position and Narrative Summary of Evidence and 
Legal Theories of the National Rural Electric Cooperative Association 
and the American Public Power Association, File No. 3-11616, (Nov. 30, 
2004). 

[22] See American Electric Power Company, Inc., Release No. ID-283, 
2005 WL 1036365 (May 3, 2005).

[23] See Energy Policy Act of 1992 § 711, 15 U.S.C. § 79z-5a (2000).

[24] 17 C.F.R. § 250.58. Energy trading companies broker and market 
energy commodities, which involves selling electric power in the 
wholesale market by taking advantage of price differentials in back-to- 
back purchases and sales. Examples of other nonutility energy-related 
companies include, among others, companies that provide energy 
management or demand-side management services and sell electric and gas 
appliances. The exemption provided by Rule 58 with respect to the 
acquisition by registered holding companies of energy-related companies 
is limited to investments that do not exceed the greater of $50 million 
or 15 percent of the holding company's total capitalization.

[25] See Allegheny Energy, Inc., et al., Holding Co. Act Release No. 
27579 (Oct. 17, 2002); Allegheny Energy, Inc., et al., Holding Co. Act 
Release No. 27652 (Feb. 21, 2003), Allegheny Energy, Inc., et al. 
Holding Co. Act Release No. 27701 (Jul. 23, 2003); Allegheny Energy, 
Inc., et al., Holding Co. Act Release No. 27963 (Apr. 29, 2005); and 
Xcel Energy Inc., Holding Co. Act Release No. 276812 (May 29, 2003).

[26] Generally, SEC requires companies to maintain a benchmark equity- 
capitalization ratio of 30 percent.

[27] See Comments and Request for Hearing of Harbert Distressed 
Investment Fund, LTD. Regarding Form U-1 and Declaration of Allegheny 
Energy Under the Public Utility Holding Company Act of 1935, File Nos. 
70-10251 and 70-10100 (Feb. 18, 2005). 

[28] Allegheny Energy, Inc., et al., Holding Co. Release No. 27963 
(Apr. 29, 2005).

[29] U.S. Securities and Exchange Commission, "Regulation of Public 
Utility Holding Companies" (Audit 372). Oct. 20, 2003.

[30] U.S. Securities and Exchange Commission, "Regulation of Public 
Utility Holding Companies" (Audit 372). October 20, 2003.

[31] U.S. Securities and Exchange Commission, "Regulation of Public 
Utility Holding Companies" (Audit 372), Oct. 20, 2003. 

[32] Under Rule 6, the Commission can take steps to revoke a company's 
exempt status if it determines that questions exist as to whether the 
exempt company continues to qualify for the exemption. 17 C.F.R. § 
250.6.

[33] See In the Matters of the Applications of Enron Corporation, 
Holding Co. Act Release No. 27782 (Dec. 29, 2003). 

[34] Under Sections 3(a)(3) and 3(a)(4), a company that is only 
incidentally or temporarily a holding company is eligible for an 
exemption. 15 U.S.C. §79c(a)(3)-(4).

[35] U.S. Securities and Exchange Commission, "Regulation of Public 
Utility Holding Companies" (Audit 372), Oct. 20, 2003.

[36] As with PUHCA orders, SEC will not issue PUHCA no-action letters 
until other regulators, such as FERC or the relevant state utility 
commission, have approved the transaction, if such approval is 
necessary. 

[37] However, we did identify one instance in which the staff issued a 
written denial of no-action relief from PUHCA. See Kaufman and Broad, 
Inc., SEC No-Action Letter, 1985 LEXIS 2344 (May 16, 1985).

[38] In addition to CFTC, we compared SEC's process for issuing PUHCA 
no-action letters with processes within SEC's Office of the Chief 
Counsel in the Division of Investment Management and SEC's Office of 
the Chief Counsel in the Division of Corporation Finance.

[39] Investors would seek these letters because PUHCA requires holding 
companies to seek an exemption or register under the act. 

[40] See American Gas & Electric Co. v. SEC, 134 F.2d 633, 642 (D.C. 
Cir. 1943).

[41] See, for example, Koppers United Co. v. SEC, 138 F.2d 577 (D.C. 
Cir. 1943); Hartford Gas Co. v. SEC, 129 F.2d 794 (2ND Cir. 1942); 
Detroit Edison Co. v. SEC, 119 F.2d 730 (6TH Cir. 1941); H.M. Byllesby 
& Co., 6 S.E.C. 639 (1940); Allied Chemical & Dye, 5 S.E.C. 151 (1939); 
West Penn Railways, 2 S.E.C. 992 (1937).

[42] See, for example, General Electric Capital Corp., SEC No-Action 
Letter, 2002 WL 837537 (Apr. 26, 2002); Berkshire Hathaway Inc., et 
al., SEC No-Action Letter, 2000 WL 294900 (Mar. 10, 2000); Nevada Sun- 
Peak Limited Partnership, SEC No-Action Letter, 1991 WL 178782 (May 14, 
19991); Colstrip Energy Limited Partnership, SEC No-Action Letter, 1988 
WL 234462 (Apr. 25, 1988). A limited partnership is a business 
structure that allows one or more partners to enjoy limited personal 
liability for partnership debts while another partner or partners 
(called general partners) have unlimited personal liability. The 
general partner manages the day-to-day operations of the partnership.

[43] See John Hancock Mutual Life Insurance, SEC No-Action Letter, 1986 
LEXIS 2559 (Jul. 23, 1986). In granting no-action relief, the staff 
concurred with the opinion of the investors' legal counsel that the 
investors, who owned an aggregate of 37.5 percent of the limited 
partnership, were merely passive investors and, as limited partners, 
were prohibited by both the partnership agreement and applicable state 
law from participating in the management or control of the 
partnership's business. The initial partnership proposed to acquire and 
operate a hydroelectric facility and thus became a public utility 
company. 

[44] See, for example, General Electric Capital Corp., supra note 42; 
Berkshire Hathaway Inc., supra note 42.

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