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for exemption. Additionally, the Commission holds that operations of intrastate holding companies can be successfully controlled by the States. In our report, we questioned the Commission's positions for a number of reasons.

1. It largely ignores the act's requirement that no

exemptions be granted if they are detrimental to
the interest of the public, investors, or consumers.

2. Its separate standards for regulated and exempt com

panies produce inconsistent results.

3. It ignores the fact that companies that are geograph

ically intrastate engage in transactions affecting
interstate commerce.

4. It assumes that the States have authority as com

prehensive as the Commission's and that they use it effectively (the Commission, however, has taken the position that its authority does not duplicate that of the States).

Putting all this aside, the fundamental question is whether the act's constraints--which are intended to protect the interests of the public, investors, and consumers--are still relevant after 42 years. We reported that the sparse data collected by the Commission did not enable us to reach an objective conclusion. Accordingly, we recommended that the Commission review the act's standards for granting exemptions and determine whether continuation of its present exemption policies is in the public interest.

The Commission stated in its comments that our report seemed to assume that geographic location of utility companies was an inappropriate criterion for exemption. It responded that, to the contrary, section 3 of the act makes geographic location a primary standard for exemptions, whether or not the company meets all of the requirements enumerated in section 11. Section ll, frequently termed "the heart of the act, " contains important restrictions on utility companies' size, corporate structure, and operating modes. According to its comments, the Commission has held from the earliest days of the act's administration that a utility holding company does not have to meet all section 11 standards to obtain a section 3 exemption. The Commission explained at some length how the exempt companies identified in our report meet the Commission's exemption criteria. In conclusion, the Commission stated that it saw no need for changing its interpretation of the act's exemption provisions or for seeking amendatory exemption legislation.

We agree that intrastate geographic location can be a basis for considering exemptions. We found that companies which have been exempted conduct utility operations predominantly in one State. While geographic location is a basis for exemption, the Commission can refuse to grant an exemption if it finds that the exemption will be detrimental to the public interest or the interest of investors or consumers. The Commission does not take into account the requirements of section 11 in determining whether an exemption would be detrimental. We believe this interpretation of the exemption provision does not produce the results intended by the act, although we recognize that the act places the responsibility for determining detriment to the public interest or the interest of investors or consumers in the Commission.

INVESTMENT IN FUEL-RELATED VENTURES

We reported that both regulated and exempt companies had made costly, high-risk investments in fuel and fuelrelated businesses which were outside their primary area of utility expertise and which ran in scope from research, exploration, and extraction to transportation and storage, and spanned the conventional fuel sources of coal, gas, and oil. We reported that in approving investment requests for regulated companies, the Commission had relied almost entirely on company-submitted data which, in our opinion, were inadequate. We also reported that the Commission did not have information on how the public, investors, and consumers were affected by permitting the companies to invest in fuel businesses. The potential for harm, therefore, had not been determined. Accordingly, we recommended that the Commission conduct a study to determine if such investments were necessary and in the best interests of the public, investors, and consumers.

The Commission stated in its comments that the companies' individual proposals for financing had received special review attention with a strong emphasis on the proposals' technical and economic features. Full explanations, it said, were required regarding companies' expected use of fuel and the reasons why other fuel sources had become unavailable. The Commission noted that developing alternatives to utilities' going into fuel and fuel-related businesses would require studies of much broader fields than the utility industry.

Our report recognized that the fuel crisis could either (1) represent a sound reason for utility companies to engage

in fuel businesses in the manner and to the extent that they had or (2) merely be the plausible event which had been used to justify diversification beyond the conventional boundaries of utility service. Because the Commission lacks information needed to show that its approval of companies' fuel ventures meets the public need for continuing utility service, we recommended further consideration of these diversification activities.

CONCLUSIONS

In its comments the Commission acknowledged that its level of regulation had declined but held that this represented an accommodation to substantial achievement of the act's objectives. The Commission stated that,

"* * * contrary to the conclusion of the Comptroller
General, the general policy of the Commission in ad-
ministering this legislation has consistently been
to give full effect to the Congressional intent of
preventing the repetition of those abuses which led
to passage of the act in 1935."

Overall, the Commission's comments on our report suggest a more vigorous and meaningful exercise of regulatory oversight over utility holding companies than the Commission actually provides. We still believe, as recommended in our report, that a study of developments in the gas and electric utility industry is needed to assess the continued usefulness of the act.

RECOMMENDATION TO THE CONGRESS

We therefore recommend that the Congress direct the Commission to (1) make the study of developments in the gas and electric utility industry as required by section 30 of the act and recommended by our June report and (2) report back on the results.

COMMENTS OF THE SECURITIES AND EXCHANGE COMMISSION
ON THE COMPTROLLER GENERAL'S REPORT OF JUNE 20, 1977,
TO THE CONGRESS ON THE ADMINISTRATION OF THE PUBLIC

UTILITY HOLDING COMPANY ACT OF 1935

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