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SEC Blows a Large Hole in PUHCA Rules

SEC Blows a Large Hole in PUHCA Rules

While Congress continues its unending debate over repeal of the Public Utility Holding Company Act (PUHCA), the Securities and Exchange Commission (SEC) just about did the deed last week with an order allowing a subsidiary of the California-based Sempra Energy to have controlling interest in a North Carolina partnership that will construct, own and operate a gas utility distribution system in North Carolina. (Rel. 35-26971)

The order in the case of Sempra Energy, an exempt holding company under Section 3(a)(1) of PUHCA, hangs on a new interpretation of the word "integrated." Section 11 of the statute generally confines the utility properties of a registered holding company under the act to a "single integrated public-utility system," either gas or electric. The act also requires that a proposed utility acquisition economically and efficiently serve the integrated system. In the past an integrated system has meant a contiguous system. That definition was stretched slightly in a 1996 decision allowing MCN Corp. to acquire interests in a gas company in southern Missouri, since the two were in the same region.

The SEC order issued Feb. 1 authorizing Sempra, parent of Southern California Gas and San Diego Gas &amp Electric, to acquire 90.1% of the outstanding shares of Frontier Energy, LLC, which will build the North Carolina utility, extended integration clear across the country.

The SEC noted the many changes in the deregulating natural gas market and a 1991 court decision that says "[a]n agency is not required to '"establish rules of conduct to last forever."' It accepted the company's argument that its Sempra Trading subsidiary, which acquires and trades gas in many locations in the U.S. and which has leased space on Transco to deliver to the new distribution system, will provide economies for the North Carolina consumers. Also, another subsidiary, Sempra Ventures, will oversee construction and provide administrative services for the new system which will save $1.8 million in start-up costs and $300,000 annually.

Regarding the 1935 act's requirement that the "integrated" system get its gas from a common source of supply, the SEC noted the company's argument that Sempra Trading buys a significant amount of gas in the San Juan and Permian Basins which will be shipped to all three distribution companies. "We believe it is appropriate to treat gas systems that purchase gas from a common source of supply as being in a 'single area or region' when doing so does not undercut the policies of the Act."

While the Congress may have fallen down on the job, "the United States Supreme Court has stated that 'agencies are supposed, within the limits of the law and fair and prudent administration, to adapt their rules and practices to the Nation's needs in a volatile, changing economy.'"

PUHCA was formulated to avoid ownership of widely dispersed utility properties which do not lend themselves to efficient operation," the SEC order said. "We have determined that 'substantial economies may be effectuated' by the operation of the combined properties as a 'single coordinated system'." The SEC cited the strong public interest in the project, the backing of the North Carolina Commission and the fact the new system will have its own local management.

"Frontier is expected to realize significant benefits as part of the Sempra system, particularly in the areas of gas supply, increased purchasing power, and the ability to utilize the expertise and resources available from Sempra's public-utility and other subsidiaries."

Ellen Beswick

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