quite likely to be participating in such nuclear electric generating undertakings, and whose participation would appear desirable during a research and development period. While such industrials may be able to obtain exemptions under section 3 (a) of the Holding Company Act, the multiple sources for exemptions appear to make the whole administrative problem both disjointed and cumbersome. Finally, and in a more general vein, we believe that consideration should also be given to exempting "affiliates" as well as holding companies, under section 5. This is necessitated by the fact that the section 4 exclusion seems to be limited to a subsidiary which only owns heat-generating facilities; section 5 exempts parent "holding companies" even when the subsidiary owns both heat and electric-generating facilities, but affiliates would not, under the proposed language, have the same advantage. Therefore, we conclude that section 5 may make feasible, without invoking the Holding Company Act, participating undertakings whereby some industrials and utilities of wide geographical separation own securities of a company owning facilities for the nuclear generation of heat and electricity and for the transmission of that electricity. However, we believe that it does so in an unduly complicated manner insofar as nuclear generated power is concerned, and that it falls somewhat short of what it appears it was intended to accomplish. The Bureau of the Budget has advised that it has no objection to the submission of this report. DEAR MR. CHAIRMAN: Reference is made to your letter of July 28, 1955, acknowledged July 29, 1955, requesting a report on S. 2643, a bill to exempt from regulation under the Public Utility Holding Company Act of 1935 companies meeting certain conditions. We have no special information as to the need for or desirability of the legislation and, therefore, we make no recommendation in regard to its disposition. It should be noted, however, that the Public Utility Holding Company Act of 1935 was designed to prevent certain abuses existing at the time of its enactment. Any exceptions to the act could, conceivably, make possible a recurrence of such abuses. While we do not intend to imply that such abuses will or may result from the enactment of S. 2643, we suggest that the legislation be carefully examined for such possibility. Sincerely yours, JOSEPH CAMPBELL, Comptroller General of the United States. Hon. WARREN G. MAGNUSON, DEPARTMENT OF JUSTICE, OFFICE OF THE DEPUTY ATTORNEY GENERAL, Chairman, Committee on Interstate and Foreign Commerce, United States Senate, Washington, D. C. DEAR SENATOR: This is in response to your request for the views of the Department of Justice concerning the bill (S. 2643) to promote the common defense and the general welfare of the people of the United States by encouraging maximum development of low-cost electric energy from all sources of power, including atomic energy, coal, oil, natural gas, and water, and for other purposes. The bill, which would be cited as the Electric Energy Development Act of 1955, would declare it to be its purpose to encourage maximum development of lowcost electric energy by amending certain provisions of the Public Utility Holding Company Act of 1935 (49 Stat. 838; 15 U. S. C. 79, et seq.). Among the amendments proposed, the bill would exempt from the definition of the term "electric utility company," in section 2 (a) (3) of the act, companies whose only con nection with the generation, transmission, or distribution of electric energy is the ownership or operation in whole or in part, directly or indirectly, of facilities for the production of heat from special nuclear material which heat is used, directly or indirectly, in the generation of electric energy. This amendment would mean that companies whose sole connection with the production of electric energy is the ownership of a nuclear reactor would not be "electric utility companies" within the meaning of the Holding Company Act. The bill would also amend section 2 (a) (7) of the Holding Company Act by adding a provision to the definition of a "holding company" to the effect that a company not otherwise a holding company shall not be deemed to be a holding company under the act solely because of it owns, controls, or holds with power to vote, 10 percent or more of the outstanding voting securities of a company (1) which has facilities only for generation and transmission and not for distribution of electrical energy; (2) all of whose outstanding voting securities are owned by two or more electric utility or holding companies which themselves own or operate utility assets which are located within an area within which the energy produced by such company can economically and feasibly be transmitted and sold and are physically interconnected with the facilities of such company; (3) all of whose electric energy is sold to one or more of the electric utility companies, or subsidiaries of the holding companies which own the voting securities of such company, or to the United States, a State, or any political subdivision or instrumentality thereof, and (4) the issuance of whose securities and the securities of each of the electric utilities or holding companies owning its securities is subject to the jurisdiction of a State commission or any agency or instrumentality of the United States. Under the present language of the Holding Company Act, any company which directly or indirectly owns, controls, or holds with power to vote, 10 percent of the outstanding securities of an electric utility is a holding company. Since enactment of the bill would exempt certain utility companies from the provisions of the Public Utility Holding Company Act, and from regulations prescribed thereunder by the Securities and Exchange Commission, it should be noted that compliance with the Commission's rule U-50, which currently requires the sale of publicly offered securities under a competitive bidding procedure, would no longer be required. Whether the bill should be enacted involves a question of policy concerning which this Department prefers to make no recommendation. The Bureau of the Budget has advised that there is no objection to the submittion of this report. Sincerely, Hon. JOHN O. PASTORE, WILLIAM P. ROGERS, Deputy Attorney General. FEDERAL POWER COMMISSION, Chairman, Subcommittee to Consider S. 2643 of the Committee on Interstate and Foreign Commerce, Washington, D. C. MY DEAR MR. CHAIRMAN: In response to your request at the hearing on the above bill April 19, 1956, I hand you herewith copies of a résumé of Federal Power Commission regulation relating to companies exempted by S. 2643 from regulation under the Public Utility Holding Company Act, prepared by our Assistant General Counsel Wahrenbrock. I trust that this résumé will meet the committee's needs. Sincerely yours, Enclosure No. 94420. JEROME K. KUYKENDALL, Chairman. RÉSUMÉ OF FEDERAL POWER COMMISSION REGULATION RELATING TO COMPANIES EXEMPTED BY S. 2643 FROM PUBLIC UTILITY HOLDING COMPANY ACT This is in response to the request of the subcommittee's chairman that the Chairman of the Federal Power Commission have someone on its staff follow the testimony in the hearings on S. 2643, 84th Congress, and supplement the 1 The stenographic transcript of the hearings of the subcommittee of the Senate Committee on Interstate and Foreign Commerce to consider S. 2643 is cited herein as ""Tr. FPC's report (Tr. 405-409)1 and its Chairman's testimony (Tr. 386-404)_ with a résumé of the regulation the FPC would administer under the Federal Power Act with respect to companies exempted by S. 2643 from SEC regulation under the Public Utility Holding Company Act (Tr. 401-404). It is believed that most of this résumé remains pertinent to the narrowed scope of the legislation which the sponsors of S. 2643 are now understood to be contemplating (Cf. Tr. 663– 665, 681, 818-819, 834, 859-862, 920-921, 934). By way of summary and conclusion of this résumé we may say that our analysis shows that two classes of companies exempted by S. 2643 would not come within any FPC regulatory jurisdiction. Those two classes are: (1) nuclear heat companies, not themselves developing electric energy; and (2) companies involved in generation, transmission, or sale of electric energy moving solely within one State. Of the other exempted companies coming within FPC regulatory jurisdiction, all are subject under present laws to FPC regulation of certain aspects of their business not regulated by the SEC (such as accounting and wholesale rates). Some additional regulation by FPC., from which they are now exempted, with respect to certain property and security transactions, would become applicable to them if they were exempted from SEC regulation. However, the scope of the additional regulation which FPC would directly and immediately exercise is narrower than the SEC's from which they would be exempted by S. 2643. Before discussing the bases of these conclusions, certain apparent misconceptions should be cleared up. The bill would not elimiante any duplication of regulation by SEC and FPC (Cf. S. 2643, p. 2, lines 10-11; Tr. 489) because there is none (Cf. Tr. 8B, 8V-8W, 340, 344-345). Congress made sure of that in enacting the Public Utility Act of 1935 (49 Stat. 838). That act embraces as its title I the Public Utility Holding Company Act of 1935 (15 U. S. C. 79 to 79z-6) and as its title II the additional legislation which converted the old Federal Water Power Act of 1920 (41 Stat. 1063) into the present Federal Power Act (16 U. S. C. 791a to 825r). Section 318 of the present act (16 U. S. C. 825q) eliminates all possibility of duplication between the two by providing: "SEC. 318. If, with respect to the issue, sale, or guaranty of a security, or assumption of obligation or liability in respect of a security, the method of keeping accounts, the filing of reports, or the acquisition or disposition of any security, capital assets, facilities, or any other subject matter, any person is subject both to a requirement of the Public Utility Holding Company Act of 1935 or of a rule, regulation, or order thereunder and to a requirement of this act or of a rule, regulation, or order thereunder, the requirement of the Public Utility Holding Company Act of 1935 shall apply to such person, and such person shall not be subject to the requirement of this act, or of any rule, regulation, or order thereunder, with respect to the same subject matter, unless the Securities and Exchange Commission has exempted such person from such requirement of the Public Utility Holding Company Act of 1935, in which case the requirements of this act shall apply to such person." When it came to eliminating possible duplication in accounting regulation, however, Congress made an exception to this dominance of SEC regulation by a specific provision in section 20 (b) of the Public Utility Holding Company Act preserving the accounting requirements prescribed by the FPC (and any other Federal or State accounting regulatory authority) for the companies subject to its jurisdiction and confining the SEC to supplementary requirements (Cf. Supplementary statement of SEC on S. 2643, May 24, 1956, p. 29). This meticulous avoidance of duplication of the regulation provided for in the Federal statutes as they now stand clearly indicates that there is no need for S. 2643 to eliminate "duplication" in Federal regulation (Cf. S. 2643, p. 2, lines 10-11; Tr. 489). It follows, if the bill has any practical significance (and we certainly must assume it has), that it would altogether eliminate some Federal regulation. How important such eliminations are to the public interest, is the question. The outside limits of their possible scope are indicated by testimony showing that the generating capacity of the electric utility industry will be doubled in the next 10 years (Tr. 412). This means that in 1966 50 percent of the industry's capacity will be new generating capacity added since 1955. This 50 percent, moreover, will be in addition to the new plants built to replace the old fuel electric generating plants retired during the same period. Assuming an average life of 35 years for the retired plants, it may be expected that such retirements and replacements will average 1 million kilowatts per year. This is 4.4.percent of the 230 million kilowatts anticipated total capacity in 1966 (Tr. 412). Taking into account the sizes and geographical distribution of facilities, it may be estimated that with 54.4 percent of the total generatng capacity represented by new plants, up to 35 percent of that 1966 total may be within the scope of the proposed exemption. Thus, the amendments under consideration are not of a "minor and technical nature" (Cf. Tr. 104), but raise the very important question of what Federal utility regulation there shall be for a part that may amount to as much as 35 percent of the Nation's total electric utility power supply at a date no further in the future than 1956 is from the end of the last world war. It should be noted that this résumé provides information with respect to matters that are beyond the scope of the FPC's comments and recommendations on S. 2643. The FPC's position, of course, is as stated in its report. That is to say, it is confined to the proposed exemption relating to those hydroelectric generating companies which would be subject to the FPC's licensing jurisdiction under part I of the FPA (based on occupancy of, or effect upon, navigable waters, or occupancy of public lands, of the United States) as well as to the FPC regulatory jurisdiction under part II of the FPA (based on interstate transactions in electric power) to which most of them would probably also be subject, in part at least. This résumé, however, will also cover large conventional steam-electric and nuclear heat and/or electric, generating subsidiaries, as to which FPS jurisdiction would usually attach (under pt. II of the FPA) in those cases in which there would be interstate transactions in some or all of the electric power generated. We shall not undertake to state what regulation is provided under the Public Utility Holding Company Act, believing that the scope and incidences of that regulation, as well as the standards guiding SEC in its exercise, are better to be explained by the SEC. Where it is necessary to refer to that regulation, we shall endeavor to conform to SEC's description of it (see Supplementary Statement of SEC on S. 2643, May 24, 1956, pp. 22–29). I. EXEMPTED COMPANIES NOT REGULATED BY FEDERAL POWER COMMISSION Two classes of companies that would be exempted from SEC regulation by S. 2643 would not be subject to any regulation by the FPC. These are: (1) nuclear reactor companies that do not produce and sell or transmit any electric power, and are not controlled by or subject to common control with a company that does, but only develop and sell heat for power production at arm's length; (2) generating companies producing and selling electric power that is generated, transmitted, distributed, and consumed in a single State, and sponsors purchasing such power. (1) The first kind of company may be illustrated hypothetically by the Power Reactor Development Corp. That company, a nonprofit Michigan corporation whose membership includes 26 utility and industrial corporations, proposes to build and operate a nuclear reactor at a cost of $40 million, on the westerly shores of Lake Erie, approximately 6 miles north of the city of Monroe, Mich., and sell steam produced by the reactor to the Detroit Edison Co. Detroit Edison Co. has offered to participate both as a member-donor to the Power Reactor Development Corp. and by building a 150,000-kilowatt steam turbine-electric generator at a cost of $14 million on the same site, utilizing the steam so purchased and transmitting the electric output to its electric utility system in the State of Michigan (tr. 236–254).* Although the FPC has never passed on the question, it would appear that the FPC would have no regulatory jurisdiction whatever with respect to the Power Reactor Development Co., even if some of the nuclear-produced electric energy 2 See Tr. 236, et seq. In using actual situations for illustrative purposes we are not to be understood as expressing any opinion with respect to the actual jurisdiction of any regulatory agency over any particular company or person or what any agency has done or would do in any actual situation. 3 Presumably the $14 million investment will be added to Detroit Edison's rate base on which it is entitled to a fair return. It probably expects that that return, plus the operating expenses of the turbogenerator (including whatever is paid to the Power Reactor Development Corp. for steam) will be recovered in the rates it charges. Whether it will also seek to include in its utility rate base or operating expenses its donations and contributions to that corporation does not appear from the transcript of the hearing (but see Supplementary Statement of SEC on S. 2643, May 24, 1956, p. 8, footnote No. 1; and hearings, Joint Committee on Atomic Energy, on Development, Growth, and State of the Atomic Energy Industry, February 7-10, 1955, pp. 246-247). However, to the extent that costs for nuclear-power production in excess of those for the most economical alternative conventional power production are incurred by a utility, it is, of course, in the long run the ratepayers who ultimately pay for the nuclear development. is transmitted and/or sold at wholesale in interstate commerce, so long as that company sells its heat at arm's length. And this would still be the case if S. 2643 were amended to provide, on page 2, line 24, for the exemption of subsidiaries owning or operating facilities for the production of "heat and/or electric power" (tr. 571; cf. tr. 388-391, particularly the third to sixth lines on tr. 391). This is because the jurisdiction of the FPC under part II of the FPA is based on transmission, or sale at wholesale of electric energy in interstate commerce and companies owning or operating facilities for such transmission or sale (sec. 201),* and no mere alteration of the exemption would extend FPC's jurisdiction. (2) The second kind of company which, if exempted from SEC regulation by S. 2643, would not subject to any FPC regulation, may be illustrated hypothetically by Illinois Power Co. It is 1 of 5 sponsors of Electric Energy, Inc. (E. E. I.), each owning 20 percent of that company's common stock and purchasing part of that company's electric power output. E. E. I., an Illinois corporation, owns and operates a large conventional steam electric generating plant at Joppa, Ill. For present purposes it would make no difference if E. E. I. were producing its electric power from nuclear fuels. Illinois Power Co. apparently claims that it is not a "public utility" subject to regulation as such under part II of the FPA, although its jurisdictional status has not been determined by the FPC. The claim presumably is based upon the assumption that none of the power transmitted, distributed, or sold by the company, including that which it purchases from E. E. I., is transmitted from the State in which it is generated and consumed outside thereof. (tr. 599-600; Moody's Public Utility Manual, 1955, pp. 964966; Illinois Power Co., Power System Statement, 1954, FPC form No. 12; In the Matter of Central Illinois Public Service Co., FPC docket No. E-6470, order issued January 28, 1953.) This, if true, removes any basis for FPC jurisdiction under part II of the FPA. SEC's jurisdiction, on the other hand, is not based solely on interstate commerce in electric energy but also on interstate commerce in securities and on use of the facilities of interstate commerce in the negotiation and consummation of corporate and financial transactions. Congress could of course use the same basis for broadening FPC's jurisdiction. II. FPC REGULATION OF COMPANIES EXEMPTED BY S. 2643 Our consideration of FPC regulation of exempted companies over which it has some regulatory jurisdiction will be addressed to three points: (A) the scope of the jurisdiction FPC would exercise in the absence of an exemption from SEC regulation under the Public Utility Holding Company Act; (B) the additional regulatory jurisdiction FPC would exercise where there is such an exemption; and (C) a comparison of that additional FPC regulation with the SEC regulation lifted by the exemption. A. Scope of FPC regulation of companies subject to SEC regulation 1. The following regulatory jurisdiction is exercised by the FPC under part II of the FPA over or relating to "public utilities," i. e., companies which own or operate facilities for transmission or sale at wholesale of electric energy in interstate commerce, irrespective of whether its source is in nuclear fuel or conventional prime movers and regardless of whether the same person is also subject to regulatory requirements imposed by or under the Public Utility Holding Company Act with respect to activities not regulated by or under part II of the FPA: (a) Corporate and financial regulation: Accounting and depreciation (sec. 301, 302, 208). This is true in spite of the obvious fact that the price of the steam from the nuclear reactor will very largely determine the cost of the electric energy produced, and the nuclear heat company might not be a nonprofit corporation in the next case. Thus the sale of steam is very little different from the first sale of electric power by the generating company, concerning which the Supreme Court said of the rate charged by a conventional company generating electric energy: "If intervening companies might purchase from producers in the State of production, free of Federal control, cost would be fixed prior to the incidence of Federal regulation and Federal rate control would be substantially impaired if not rendered futile." Jersey Central P. & L. v. F. P. C., 319 U. S. 61, 71–72. 5 The FPC has not formally passed upon the question of the precise time when a new corporation constructing facilities which it subsequentlp operates for transmission and/or sale at wholesale in interstate commerce becomes a "public utility." So far as we are aware the FPC has never asserted that a company was a "public utility' subject to regulation as such under the FPA on the sole basis of its ownership of facilities intended to be operated for transmission or sale at wholesale in interstate commerce before they had ever been so operated. Compare Supplementary Statement of the SEC on S. 2643, May 24, 1956, pp. 29-30. |