Adequacy of FERC’s Consumer Protections

“In 2005, when we passed the Energy Policy Act we did a number of things in the electric utility industry. Among the most important was the repeal of the Public Utility Holding Company Act. PUHCA had stood as an important consumer protection statute since 1935.

“In the Thirties, when PUHCA was passed, the country had just been through a great deal of turmoil in the electric utility industry. In the Twenties, the industry had expanded rapidly. The financing of that expansion was through some highly questionable corporate practices. Large complicated holding company structures were developed, sprawling across the country. Regulation by the states was almost impossible. There was no federal regulation. Many observers credit the Ponzi schemes developed to finance electricity expansion with being one of the main causes of the stock market crash of 1929.

“Congress and the Roosevelt administration passed PUHCA to get control of the corporate structure of the electricity industry. It did that in two ways. First, ownership of utilities by other kinds of businesses or ownership of other businesses by utilities was discouraged or outright barred. Second, large, multistate holding companies were required to file all affiliate transactions and all transactions with utility affiliates had to be at-cost.

“The intent was to keep corporate structure simple enough that state regulators could keep track of it or to subject multistate systems to stringent regulation of interaffiliate relationships at the Federal level.

“So, as we began to move toward a more competitive industry, many viewed PUHCA as outmoded. Its strict ownership requirements discourage potential investors. Its geographic and structural requirements discouraged new entrants into markets. And I agreed with that point of view. I still do. However, I also felt that the consumer protections of the Holding Company Act should not be lost entirely. I insisted that part of the legislation we would enact would strengthen FERC’s merger authority to require clearer protection against cross-subsidization and pledges of debt on the part of a utility for the benefit of its affiliate companies.

“Many in Congress believed that this was not enough – that consumers would not be protected without broader safeguards. We had just been through another era when utilities were getting into financial trouble because of their relationships with their corporate affiliates and members of Congress were concerned. Some of these protections were accepted, such as my merger authority language and Sen. Cantwell’s proposed market manipulation provisions that were included. Others, such as Senators Feingold and Brownback’s proposal for affiliate transactions amendment, were not accepted.

“At that time, they asked for a report to be done by the Government Accountability Office and that a hearing be held. I supported that request and this hearing is a result of that request.

“GAO has issued its report, and GAO is here today to testify as to the conclusions. They were highly critical of FERC’s application of its new merger authority and of its cross-subsidization regime in general. FERC is here, primarily to argue that the rules they put in place are sufficiently protective.

“If GAO is correct and FERC’s rules are insufficient, that is very serious and something needs to be corrected. If Chairman Kelliher is correct and FERC is protecting consumers adequately, then obviously we have nothing to worry about.. We are here today to look into that exact question.”

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