SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3868 words

COMMITTEE: SENATE ENERGY & NATURAL RESOURCES

HEADLINE: REPEAL OF PUBLIC UTILITY HOLDING CO. ACT

BILL-NO:

 

H.R. 2363             Retrieve Bill Tracking Report


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TESTIMONY-BY: MR. DAVID SOKOL ,, CHAIRMAN AND CEO ,

AFFILIATION: MIDAMERICAN ENERGY HOLDING CO. , DES MOINES IA

BODY:
Hearing: To examine the potential effects of Subtitle B of S.1766, Amendments to the Public Utility Holding Company Act, on energy markets and energy consumers.

February 6, 2002 9:30 AM

Witness Name and Title:

Mr. David Sokol , Chairman and CEO , MidAmerican Energy Holding Co. , Des Moines IA

Testimony: Thank you, Mr. Chairman. MidAmerican Energy Holdings Company is a diversified, international energy company headquartered in Des Moines, Iowa with approximately $11 billion in assets. Our largest investor is Berkshire Hathaway, one of the only AAA-rated companies in the United States.

The Company consists of four major subsidiaries: CE Generation (CalEnergy) a global energy company that specializes in renewable energy development in California, New York, Texas and the West, as well as the Philippines; MidAmerican Energy Company, an electric and gas utility serving the states of Iowa, Illinois, South Dakota and a small part of Nebraska; Northern Electric, an electric and gas utility in the United Kingdom; and HomeServices.com, a residential real estate company operating throughout the country. I'd like to commend you for your persistence in working to include electricity modernization provisions in the Senate energy bill. We cannot pass a national energy plan for the new century while leaving in place a regulatory system that was already outdated at the end of the last. Your bill does not seek to do everything, but it does critical things that only Congress can do, among these are:

1) Establishing a mandatory, enforceable electric reliability regime 2) Replacing the outdated PURPA mandatory purchase requirement with measures to promote distributed generation and standardize interconnection procedures 3) Bringing all owners of significant transmission assets under FERC jurisdiction to create a more seamless interstate system 4) Adopting a variety of consumer protection measures and information transparency requirements 5) Replacing the PUHCA law of 1935 with enhanced regulatory access to the books and records of all utility holding companies while adopting a more thorough merger review policy

This package represents a consensus of those who have worked actively in support of legislation for many years and will result in a modernized electric infrastructure that will benefit consumers while providing for fair competition.

As the American economy begins to recover, demands on our electric system will increase once again, and if we have not moved forward with the critical elements of market modernization, consumers may once again pay the price for an outdated system. At the same time, we should recognize that the pending recovery is tenuous and take steps to encourage the markets and American consumers that there is bipartisan support for positive, pro- investment initiatives.

In your invitation to testify, you specifically asked me to comment on a number of issues related to the PUHCA law, including issues of consumer protection, barriers to investment and market entry, and appropriate forums for regulatory oversight.

These three issues are unavoidably linked. Ten years ago, Congress passed the Energy Policy Act of 1992 in order to create open, competitive wholesale electricity markets so that investors, not consumers, would bear the risks associated with capital-intensive, electric generation investment. That is when PUHCA changed from being primarily a nuisance for companies to a burden for consumers.

By keeping investment dollars out of the industry and perpetuating market fragmentation, PUHCA contributed to the failure of our electric infrastructure to keep pace with the demands of the growing competitive wholesale market. MidAmerican's largest investor, Warren Buffett, has publicly announced his intention to invest as much as $15 billion in the industry once PUHCA is repealed. However, PUHCA's barriers to entry prevent him from making these investments, particularly in transmission and distribution assets.

Last year, I testified in both the Senate and the House of Representatives as to how PUHCA blocked MidAmerican from making major investments in the California utilities that could have helped stabilize their financial positions during the early part of the energy crisis. PUHCA's ownership limitations and physical integration requirements stood in the way.

PUHCA is also complicating attempts by the company to make a major expansion of our geothermal development in the Imperial Valley in Southern California. While we have begun a smaller project, we cannot undertake any expansion that would require us to build significant new transmission facilities to bring this power to the grid without potentially running afoul of PUHCA.

Some have claimed in recent contacts to the SEC that one cannot invest in a regulated utility asset and also make good non- utility investments. No law can make a good investor or a bad investor. Nor should any law determine that a person who invests in one industry should not be able to invest in another provided there are no conflicts of interest.

PUHCA and those who support its predetermined limitations on who can invest in this industry take a shortsighted approach. The way to protect consumers is not to maintain a Chinese wall around investment in this industry it is to maintain effective separation of the financing and rate structures of regulated utilities and their assets and any affiliated operations.

There has not been much good news in energy markets in recent months, and even conservatively managed traditional utilities are feeling financial pressure. This will make it harder than ever for the industry to raise capital and build new infrastructure. And, as consumers in California and the West experienced in recent years, market failure is the ultimate anti-consumer result.

PUHCA is not, and never was designed to be primarily a consumer protection statute. The overwhelming focus of the law is on preventing corporate malfeasance that harms investors. By eliminating financial abuses, Congress certainly expected that consumers would benefit, but PUHCA does not address rates, and the implementing agency, the SEC, has no rate setting function or expertise.

Simply put, if the issue is protecting consumers from unfair rates, FERC and the states have developed the expertise over almost seventy years to perform these functions. The SEC has absolutely no rate-setting function and has emphasized this fact on many occasions before Congress.

On the issue of cross-subsidies, the appropriate protection against cross-subsidization is the books and records access provided in the bill. Using my own company as an example, if the state of Iowa had concerns that MidAmerican Energy was inflating rates in our retail electric or gas tariffs to support a competitive business in some other state, under the bill, state regulators would have an explicit right in federal court to gain access to the books and records of any affiliated business in any other state that had conducted business with the utility.

At the same time, the Committee should be wary of attempts to make FERC some type of super-regulator of retail rates in all fifty states in the name of stronger protections against cross- subsidization. FERC's expertise is wholesale rates. State commissions are closest to the details of retail rate-setting and capital structure decisions. Muddying the water on this fairly clear distinction would be a recipe for disaster. We've already seen during the California crisis the debilitating impact that finger-pointing between Washington and the states can have on effective regulation. We should not go down that road.

The only rate-related provision of PUHCA relates to "at cost" pricing. While the law seeks to ensure that utilities and their affiliates do not engage in inter-affiliate pricing schemes to inflate consumer costs, the "at cost" requirement in the PUHCA law actually limits the ability of state and federal regulators to require registered holding companies to price some goods and services at the lower of "at cost" or market rates.

Much of this ground has been well-covered in recent years. That is why the PUHCA provisions included in this bill have been part of virtually every electricity modernization bill introduced in the last several Congresses, have enjoyed the support of the last four Administrations and the regulatory agencies that enforce the laws, and passed the Senate Banking Committee earlier this year by a 19-1 vote.

What has changed then?

We are here this morning because a few long-time opponents of updating the PUHCA law have made new claims arising from the Enron collapse. It's worth noting that one of these advocates stated last December that he could support the electricity provisions of this bill in its present form. But, I suppose that Enron fell, and opportunity knocked.

There are really two stories before this Committee today. The first is the story of what actually happened to energy markets as a result of the Enron collapse. These events should reassure the Committee that you should move forward with this legislation.

The second story is the one spun by those who have long opposed market modernization measures. It poses a series of events that did not happen and attempts to force supporters of PUHCA legislation to prove that these events could not have happened. Taken to its logical conclusion, this "expand PUHCA" agenda would require Congress, FERC and the states to unravel more than a decade's efforts to create open, vibrant and transparent energy markets.

The reason why this is so is instructive. Virtually every element of modern competitive electricity markets exists either as an explicit statutory exemption from PUHCA or as a result of regulatory determinations that gave flexible interpretations to PUHCA.

A "fundamentalist" view of PUHCA, that every electric or gas company that sells on the grid should be registered, would result in complete market concentration, elimination of the marketing industry and gutting of the EWG exemption since almost all EWGs rely on either an affiliated marketing company or independent marketers to sell competitive electricity.

Let's start with the first story. What happened to energy markets as a result of the Enron collapse?

At your hearing on this topic last week there was consensus that energy markets responded to the Enron collapse with little, if any, disruption. The lights stayed on, natural gas flowed, and consumer prices did not rise. This is true not only for the markets generally, but also for wholesale and retail customers of Enron's subsidiaries.

In December, all four FERC Commissioners testified before the House Energy and Air Quality Subcommittee that electric and gas markets had responded to the Enron collapse with remarkable resiliency. Chairman Wood repeated that assessment before this committee last week, along with independent market analysts, market participants and a representative of the state regulators.

In fact, the situation of the customers of Enron's retail electric and gas pipeline subsidiaries proves the argument that PUHCA legislation supporters have been making for almost twenty years, which is that aggressive, effective state and federal regulation are the true keys to consumer protection, not a statute that deals primarily with details of corporate structure.

It's hard to imagine a company collapsing more swiftly or more completely than Enron, yet the customers of Portland General and Northern Natural Gas, Florida Gas Transmission, Transwestern Pipeline and North Border Partners have been unaffected by the bankruptcy.

PGE's assets and operations have both regulatory and contractual safeguards. PGE has its own legal identity as a corporation, separate from Enron. It owns its own assets, and its management runs day-to-day operations, and its financial health is in good standing, as confirmed recently by several securities rating services.

This is the result of effective state and federal rate regulation and the ability of state commissions to oversee issues of utility financing and cost recovery. This is where real consumer protection occurs in electric and gas markets.

On the separate issue of whether Enron had been manipulating forward electricity markets, I commend the Committee for bringing these concerns to light.

In December, I met with members and staff on both sides of the aisle of the House Energy and Commerce Committee and shared my view that if there was any part of Enron's energy assets that had the potential for abuse, it was that company's domination of the "mark-to-market" exchange.

The allegations that Enron may have manipulated forward markets are troubling, and I encourage the Committee to pursue these further.

However, I am not aware of any way these issues could be linked to PUHCA. For those who argue that this shows that the Enron collapse did impact energy markets, I would respond that, if these allegations are proven true, it appears to have affected them in a positive direction for consumers.

Let's now look at the second story, what did not happen.

1. Enron was not working to build a multi-state Insull-like utility empire.

To the contrary, it was looking to sell Portland General. In fact, Enron probably would not even have been in the regulated utility business at the time of its collapse if PUHCA had not hampered its efforts to exit that business.

Why? PUHCA artificially limits the number of potential buyers of any utility to non-utilities and those utilities who can meet the law's physical integration requirements. The physical integration requirement demands that two utility systems must be capable of interconnection to be legally combined under PUHCA. This is one of the core problems of PUHCA. It serves as a barrier to entry and investment and results in market concentration.

This arcane and counterproductive requirement also limits California's options as the state considers how best to recapitalize its utilities.

2. Enron did not lobby for PUHCA repeal.

It was a leading opponent of stand-alone PUHCA legislation and testified before Congress that it would only support PUHCA repeal as a trade-off for concessions it wanted.

Enron's overall policy position with regard to traditional utilities can perhaps best be described as disqualify and dominate: Work to keep asset-backed utilities out of emerging energy markets, then dominate those markets.

The Committee should also be aware that in its most recent congressional testimony on electricity policy, Enron opposed enhanced access to books and records, provisions that we have long favored.

On July 22, 1999, Enron's Executive Vice President Steven J. Kean testified before the House Energy and Power Subcommittee, "we have concerns that H.R. 2363 creates unneeded regulatory oversight of affiliated companies that have no need for additional regulation of their books and records."

Supporters of PUHCA modernization and reform want more competitors in the marketplace, not fewer, and support giving federal and state regulators more tools to protect consumers.

3. Enron did not receive special exemptions from PUHCA.

Enron received two PUHCA exemptions from the SEC. Both were clear cases under the law.

The first was a statutory exemption provided to more than 50 other holding companies whose utility operations are primarily located in a single state.

The second exemption concerned the question of whether a power marketer should be considered a "public utility" under PUHCA. PUHCA defines an "integrated public-utility system" as, "a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of interconnection."

The claim that the "no action" letter Enron received for Enron Power Marketing Inc. constituted a special exemption for Enron that ultimately allowed the company to escape regulatory scrutiny is the entire basis for the claim before the Committee today. However, for the SEC to have found otherwise would have required it to find that the assets of marketers - office equipment, paper contracts, and computer data - are "facilities" of public utilities comparable to generating plants and transmission lines.

This raises the interesting question of how these types of "facilities" could meet PUHCA's "physical integration" requirement. Obviously, they could not, and no other decision by the SEC seems supportable under either the facts or the clear definition in the law.

More importantly, had the SEC decided otherwise, the entire power marketing industry would probably not have developed.

It's hard to think of any single decision that would have had a more negative impact on consumers and competitive wholesale markets.

4. What about the other exemption mentioned in the New York Times?

This exemption, to the Investment Company Act of 1940 -- not PUHCA -- is the exemption that some have claimed allowed Enron to engage is some activities that played a significant role in the company's collapse.

This appears to raise some genuine issues - but these issues have nothing to do with PUHCA, and attempts to use the Investment Company Act exemption as a way to derail electricity modernization are clearly opportunistic.

5. But couldn't the Enron collapse have been prevented had Enron somehow been subjected to PUHCA?

Since it's clear Enron should not have been considered a registered holding company, this could only be true to the extent that Congress would apply PUHCA-like financial regulations to every other publicly-traded company, energy or non-energy. There is nothing unique about the energy industry concerning Enron's financial activities.

If, as has been reported, a company is willing to risk violating the '33 and '34 Securities Acts, shred congressionally requested documents, engage in highly questionable accounting practices, knowingly mislead investors, and ultimately drive itself into bankruptcy, why would we believe that PUHCA would somehow protect its shareholders.

Congress can and should conduct a thorough review of all the accounting, bookkeeping, pension and corporate governance issues raised by this scandal. In some cases, laws and regulations may need to be strengthened. But these changes should be applied to all publicly-traded companies, not to a small subset of companies in one industry.

FERC Chairman Wood is moving aggressively to bring the wholesale electric energy market to an end-state of transparency and vibrant competition. Some are concerned that he is moving too quickly; others may believe he is moving too slowly. Few would disagree with his goal of achieving that end-state or the benefits that consumers will gain when we get there.

In his testimony before the Committee last week, he said, "If Congress' policy goal is to promote wholesale energy competition and new infrastructure construction, then reform of the Public Utility Holding Company Act of 1935 (PUHCA), supplemented with increased access by the Commission to the books and state regulators to certain books and records, will help energy consumers. Energy markets have changed dramatically since enactment of PUHCA, and competition, where it exists, is often a more effective constraint on energy prices. In the 65 years since PUHCA was enacted, much greater state and federal regulation of utilities and greater competition have diminished any contribution PUHCA may make toward protecting the interests of utility consumers."

This is not just the view of Chairman Wood, but also all the members of the Commission, and all his predecessors in the last decade. They have understood that this market will never achieve the depth, transparency and level of competition we all seek if PUHCA's barriers to entry and investment remain in place. The reasons why you must eliminate the anti-competitive and anti- consumer aspects of PUHCA are simple:

-PUHCA's arbitrary limitations hurt consumers. Just last month, The D.C. Circuit Court of Appeals remanded the SEC's approval of a large utility merger that would provide consumers and the companies involved more than $2 billion in savings, based solely on concerns related to PUHCA's single region and physical integration requirements.

While some have claimed that this decision represented some form of victory for consumer interests, I disagree. Quoting from the ruling, the Court wrote, "According to Petitioners, the Commission erred in accepting (the two companies') projections that the proposed merger would produce approximately $2.1 billion in cost savings. We disagree. We owe considerable deference to the Commission's assertion that it 'reviewed the assumptions and methodologies that underlie' the projections and found them 'reasonable and consistent with. . .precedent.' Moreover, Petitioners point to no evidence or expert testimony supporting their assertion that the companies' calculations were flawed."

-The law's ownership restrictions keep capital out of one of this country's most critical industries at a time when needs in the transmission sector alone will require tens of billions of dollars in new investment. As I mentioned before, Mr. Buffett has publicly stated his intent to invest as much as $15 billion in the industry if PUHCA is repealed.

-The law's counterproductive requirements of interconnection and geographic proximity foster regional concentration, directly counter to 50 years of antitrust law. As I mentioned during testimony in the House last year, one of the ironies of PUHCA is that the only other utility that MidAmerican could purchase without running afoul of the Act are the utility assets of the only other investor-owned utility in the state.

-As representatives of FERC have testified on numerous occasions, PUHCA hinders their ability to establish large, multi-state regional transmission organizations.

-PUHCA also provides foreign companies which are not restricted by the physical integration standard an advantage on their "first bite" entry into the U.S. market and, at the same time, sends overseas American dollars that could be invested here. In view of the series of negative events that have buffeted this sector beginning with the crisis in California and the West, the overall economic downturn and the negative financial impact of the Enron collapse on much of the sector, I believe we could see a substantial increase in this trend in the next several years.

Congress cannot fix PUHCA by tinkering around its edges. The physical integration requirement and ownership limitations that are it's main problems are embedded in the statute's core. You can, however, replace PUHCA with enhanced books and records authority and the other consumer protection measures recommended by Chairman Bingaman and move the country forward toward a competitive, pro-consumer market.

Would you like a copy of the full hearing record for this hearing?



LOAD-DATE: February 7, 2002