utility industry as required by section 30 of the act and recommended in our June report and (2) report back on the results. Our evaluation of Commission comments is presented in appendix I; the Commission's comments are in appendix II. We are sending copies of this report to the Director, Office of Management and Budget, and the Chairman, Securities and Exchange Commission. Lever A. Strate Comptroller General EVALUATION OF SECURITIES AND EXCHANGE COMMISSION COMMENTS ON GAO'S JUNE 20, 1977, REPORT The purpose of the Public Utility Holding Company Act of 1935 (15 U.S.C. 79 et seq.) administered by the Securities and Exchange Commission is to protect the public, investors, and consumers from abuses associated with the control of gas and electric utility companies by use of the holding company device. (A holding company generally is a corporation which owns and uses the voting stock of other corporations to influence their decisionmaking with the objective of controlling their policies and management.) The act was a direct response by the Congress to prevasive holding company control over the utility industry and to abuses resulting from that control. During the years immediately following passage of the act, the Commission succeeded in reorganizing or breaking up the large holding companies. In recent years, however, it has operated on the premise that its major responsibilities under the act have been carried out and that a less active regulatory effort is required. OVERSIGHT OF THE REGULATED COMPANIES In our report we questioned whether the Commission's surveillance of the 14 regulated companies was adequate. We noted that the Commission was not conducting the type of field investigations generally considered necessary to assure that the companies were complying with constraints imposed by the act on controlling influences, political payments, and intercompany transactions (such as loans, contracts, dividend payments, and sales of assets) which could lead to holding company abuse. We also pointed out that, by and large, the States did not have the authority to carry out these and other functions mandated in the act. In responding to our report, the Commission stated that it had carefully and vigorously supervised the activities of registered holding companies. It nonetheless acknowledged that most of its efforts had been devoted to financial matters, and it questioned the need for field investigations. Field investigations, according to the Commission, would be of limited benefit because: --The Commission receives from various reports information needed for surveillance of intercompany loans and dividend policies. --Intercompany transactions require Commission ap- --Field inspections would be of doubtful effective- --Commission rules effectively exclude interlocking The Commission may be correct in believing that the information reported to it is complete and reliable and that intercompany transactions conform to regulatory restrictions. Without indepth field investigations, however, we do not know whether this is so. In our view, the fact that some irregular transactions are not easily detectable, does not justify freeing them from the scrutiny of field investigations. Further, simply issuing rules, such as those restricting interlocking relations, does not mean that they will be followed. If this were true, much of the work of law enforcement groups would be unnecessary. In summary, we do not believe it is possible to be reasonably certain that regulated holding companies are in fact complying with the act's restrictions on business practices and controlling influences without the information that would be provided by the independent first-hand assessments of field investigations. Our report also questioned whether reorganization of utility holding companies had been completed. As succinctly stated by the Commission in its comments, the Congress did not intend gas and electric utility holding companies to become permanent Federal wards. Nonetheless, we noted that the Commission had no plans to reorganize the remaining regulated companies, even though it appeared from our analysis that a case could be made for further reorganization if the act's size standards were applied. We recognized, however, that these standards might not be current and complete and recommended that they be reevaluated, as contemplated in the act. The Commission commented that, in the act's early years, it studied the size of companies as it reorganized them, and that after 1955--the period when most of the growth in the gas and electric utility industry occurred--size studies appeared to be superfluous. The Commission stated that the standards governing the size of regulated companies were fundamentally sound but it did not address the issue of whether utility reorganizations in accordance with these standards had been completed. COMMISSION POLICIES IN GRANTING EXEMPTIONS Our report questioned the Commission's policy of exempting companies from the full force of the act. Some companies no doubt should be exempt, but we questioned whether those not in compliance with the act's standards should be. The act provides for exempting holding companies that conduct their utility operations predominantly within one State, with the qualification that such exemptions should not be granted if they are detrimental to the interests of the public, investors, or consumers. As to detriment, the act and its legislative history make it clear that the Congress considered it harmful for holding companies to provide both gas and electric utility service, to engage in nonutility businesses, and to control subsidiary utility companies which, on their own, are able to provide efficient and satisfactory customer service. Holding companies might otherwise restrict competition and become too large to be managed efficiently or regulated effectively. The Commission has relied primarily on the act's geographic qualifications in exempting companies as being intrastate in character. It has not required companies to comply with the act's other standards as a condition of qualifying for or retaining exempt status. We reported that, as a result, many exempt companies were --comparable in size and function to regulated com- --conducting both gas and electric utility operations; and --engaging in nonutility businesses, such as farming, travel agencies, real estate, and data processing. We do not know how many exempt companies have these characteristics. The Commission does not accumulate such data, and we did not make a detailed analysis. But our analysis of the 35 largest utility holding companies showed that 24 were unregulated. Of these, 8 provided both gas and electric services, 12 were engaged in businesses unrelated to utilities, and 18 had invested in fuel and fuel-related ventures. In granting exemptions the Commission holds that the act's limitations on size and diversification into other businesses apply only to regulated companies and not to companies meeting the intrastate geographic qualifications |